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May 31, 2002

The Triumph of the Little Guy: Finding the Secrets of Survival in Hard Times

By Tom Taulli

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  • The Triumph of the Little Guy: Finding the Secrets of Survival in Hard Times

Bigger is generally better in the trading world. A big firm can get better deals on hardware and software. Bandwidth costs tend to fall as usage increases. In fact, a big firm is likely to have its own special department to help implement new technologies, something a small firm, which trading pros tend to define as 10 traders or less, usually can't afford. By contrast, a big firm enjoys economies of scale.

In light of this, how can a small trading firm survive?

"We are constantly trying to find ways to save money with technology or anything else," said industry activist George Casey, a partner and Nasdaq market maker at Crowell, Weedon, in Los Angeles.

But small firms, say some executives, can quickly find ways to compete.

Steve Kanaval, a San Francisco-based independent consultant who helps setup trading operations for small firms, says, "You can essentially build a trading desk in three months and be competitive from a speed and accessibility level as the majors."

Web-based trading systems, he noted, are very competitive and affordable for smaller firms.

A key way to build a competitive edge is for a small firm to focus on a niche. This is what Mark Stewart has done with his firm Mark Stewart Securities in Newport Beach, Calif. He deals mostly with small-cap companies.

"A big concern is dealing with the complexities of Rule 144," said Stewart, referring to the SEC rule that puts restrictions on when a corporate insider can sell shares. "It is very important for customers to get these trades done quickly. But the bigger firms may not be so fast. Or, the trade may be placed by someone who is not familiar with the marketplace or the rules."

Another firm that knows how to compete with the behemoths, Adams, Harkness & Hill, in Boston, considers its competitive edge to be strong research.

The research focuses on three industries: technology, healthcare, and consumer. And the firm mostly trades in stocks that it researches. In all, more than 250 securities are traded by the firm, one of the largest OTC market making operations in its category.

Web As Weapon

Nasdaq considers the Web to be an effective way to level the playing field, according to Kevin Carrai, associate vice president, Nasdaq Transaction Services. "So we want to play a role in the small firm market and help these firms at every stage of their growth. We cannot ignore this important community," added Carrai, nothing that there are about 2,500 small firms.

So how, exactly, is Nasdaq going to help these small businesses?

Earlier this year, Nasdaq announced a new system called Nasdaq Workstation Weblink. As the name implies, it is a browser-based system that is geared to small trading firms. The Weblink system has strong security features.

Besides requiring a user id and password, a digital certificate needs to be downloaded and installed, which verifies that the right user is logged on.

This is usually the part of the process that takes the most time for integrating Weblink.

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