Rob Daly
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May 31, 2000

At Deadline

By Select Reporter

SLK Grows

Spear Leeds and Kellogg is hiring hundreds of trading pros to stay competitive, according to John Mulligan, a special limited partner at SLK. Booming Nasdaq volume and the switch to electronic trading in options are driving the growth. SLK hired 90 equity traders for its core Jersey City operation in recent months, bringing headcount there to 350. A new trading facility on New York's Long Island will house 150 traders by November. About 50 traders will transfer from the Jersey City office to Long Island.

The London office is also growing. Equity headcount there is jumping from 120 to 200. On the options front, SLK is building a new trading room in Jersey City to house 60 traders. A major floor specialist, SLK is bringing its options into the electronic age like other players on Wall Street.

Best Execution

The Securities and Exchange Commission and the National Association of Securities Dealers aren't doing enough to help brokerages meet best execution standards, many market makers say. All told, 70 percent of dealers responding to last month's 2000 Traders Magazine Market Makers Survey, consider the SEC and NASD's efforts inadequate. In fact, 45 percent said the efforts were 'poor' while 15 percent said the efforts were 'very poor.' Only 30 percent of market makers said the efforts were 'helpful.'

The shocking news comes at a bad time for the SEC. The agency said it intends "to monitor any significant changes in the order-routing practices of NYSE members" with its approval of the plan to abolish Big Board Rule 390. The agency will be watching how trading desks "internalize their customer order flow." That rule crimped NYSE member firms from trading listed stocks away from the exchange.

John Heine, a spokeman for the SEC, said the agency's guidance in the area of best execution has been consistent. "The broker is in the best position to determine what best execution means for its customers, depending on their needs, types of orders and market conditions," he said. The NASD did not respond to a telephone call for comment.

Nasdaq Call

Nasdaq's chief operating officer Patrick Campbell took the heat from the buyside at a conference at New York's Baruch College. American Century's enfant terrible Harold Bradley and Scudder Kemper Investment's Peter Jenkins pressed Campbell to explain why Nasdaq had not implemented a call auction to solve its chaotic opening.

"Why is Nasdaq's staff so afraid to move to a single-price open?" Bradley demanded at the conference on electronic call auctions. Campbell said it was ignorance but not fear that held Nasdaq back. Bradley asked if opposition by wholesalers was a factor. "If [a call] was dictated to them...they would be against it," Campbell conceded. An opening auction, in which all orders meet to discover a single price, is run by the specialists on the Big Board. Some observers believe a similar arrangement could help eliminate locked and crossed markets on Nasdaq. Jenkins asked if operational issues were holding back the introduction of a single-price open on Nasdaq. "Without a hard [mandatory] CLOB, for which we have been unable to win approval, there is no central point of aggregation," Campbell explained.

IPO Study

Many IPOs soar in aftermarket trading for good reason, according to a study in the The Journal of Finance this month. Underwriters purposely underprice an issue so that their dealing rooms reap the benefits of the customary buying frenzy, the study claimed. The study by Katrina Ellis, Roni Michaely and Maureen O'Hara of Cornell University's Johnson Graduate School of Management, states that trading and inventory profits comprise 23 percent of total IPO compensation. Most of the trading profits accrue to the lead manager, the study claimed.

The study determined that co-managers provide very little market making support. The lead underwriter handles around 60 percent of the trading volume in the offering's initial days. Over the following two or three months, that dips to around 50 percent of the volume. The average inventory position of the lead underwriter can reach 22 percent in that period if the security falls below its offer price, the study stated.