Commentary

Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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January 1, 2002

A Dutch Treat at NYSE? Bought out by a foreign firm was once considered the kiss of death. But for

By Peter Chapman

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  • A Dutch Treat at NYSE? Bought out by a foreign firm was once considered the kiss of death. But for

If the partners at Einhorn & Co., a small Big Board specialist, had any doubts about selling out in the summer of 1999 to the big Dutch trading house Van der Moolen Holding, they soon vanished.

In January 2001, Time Warner, one of Einhorn's top money-spinners, was delisted following its merger with America Online. The loss would have been devastating for Einhorn as Time Warner represented about a quarter of its revenues. But as part of Van der Moolen Specialists USA, the fifth largest specialist at the New York Stock Exchange, the traders at Einhorn survived to trade another day.

Einhorn is one of seven small and medium-sized Big Board specialists to sell out to Van der Moolen Holding in the past two-and-a-half years. One of the two largest, Lawrence, O'Donnell, Marcus became the platform upon which Van der Moolen Specialists was built in 1999.

It contributed four members to the firm's six-man management committee, including chief executive Jimmy Cleaver. The build-up followed an earlier aborted attempt to create a presence on Wall Street through a tie-up with the specialist LaBranche. The other large specialist, Fagenson, Frankel & Streicher, came aboard in 2000. Robert Fagenson, its CEO and a former New York Stock Exchange vice chairman, also joined the management committee.

Crowded World

Van der Moolen Specialists now trades 395 stocks, or 15 percent of the total number of NYSE stocks, with nearly 70 specialists and 230 clerks all piled on top of each other in the crowded world that is the floor of the New York Stock Exchange.

The firm is the only partnership among the top five specialists. Van der Moolen Holding has a 75 percent stake while 53 U.S. partners own the balance. That minority stake serves as an economic incentive, of course, but also engenders a family business-like culture, executives say.

"Everyone is very close here," said Joe Bongiorno, a managing partner and co-head of floor operations. "We're all friends, not just partners."

As Van der Moolen Specialists, the traders hope their collective might and larger capital base will allow them to prosper on an increasingly competitive Big Board floor.

Only eight specialists remain at the Exchange, down from 54 in 1986. The top five control over 90 percent of the volume.

Van der Moolen's rapid build-up has made it a contender for the major leagues, but it is still the kid brother in a room full of big boys. The firm trades 11 percent of the volume, but LaBranche trades 27 percent; Spear, Leeds & Kellogg trades 24 percent; Fleet Meehan trades 18 percent; and Wagner Stott Bear trades 16 percent.

Size matters. A large equity base helps a specialist firm stomach the increasingly huge positions it must take. In addition, that capital and a firm's market share are major selling points when bidding for new listings.

Those new listings, or allocations, are the lifeblood of any specialist. Unlike the Nasdaq market maker, a specialist can only trade those stocks he is allocated. And, the bigger and more actively traded they are, the greater the profits. In the first six months of 2001, about 30 percent of Van der Moolen Specialists' revenues came from its ten most active stocks.