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May 31, 2002

How One Small Firm Survived

By Brian O'Connell

Quaker Securities and a group of stubborn soldiers commanded by the father of the United States have something in common.

Quakers founder Jeff King and George Washington both made their headquarters in the same place. Washington's raggedy band of rebels and King's group of merry traders called Valley Forge, Pennsylania their home.

Both endured hardships on the rolling green hills near the banks of the Delaware River. Washington nearly ran out of food, clothing, and hope in the frigid winter of 1776-1777. While facing nothing that severe, in 1999 Quaker Securities was evaluating whether to commit resources to a trading business that only seems to have room for firms with deep pockets, according to people familiar with the firm.

Closing Doors

In fact, if not for a buyout by Citco Group Limited, a European-based financial services giant with some $75 billion in worldwide assets under management, Quaker, ranked No. 300 by Nasdaq in the 12-months ending March 31, may have faced a less prosperous future, one executive said. Officially, when Citco purchased Quaker in 1999, founder Jeff King was considering retirement, said John Lukan, president and chief executive of Quaker, which specializes in agency executions. However, he added, "I have to believe there are serious ongoing concerns for smaller firms who are unwilling, or unable, to commit the capital to survive."

"We had plenty of cash," insisted Jeff King. "But I was looking to sell for health reasons and because, as they say on Wall Street, sell when you can, not when you have to. Overall, I thought the wise thing to do was to get a partner."

Still, Lukan believes that there are smaller execution firms out there tackling that question right now. "They're asking themselves, Do I stay or do I go' and. If I stay, how much will it cost us?'"

Lukan says the odds are stacked against small firms. "Our segment of the industry is very difficult and finding new clients is very difficult," he added. "There are many reasons why managers will trade with certain brokers and not all have to do with pure execution quality. There may be obligations for soft dollars or directed brokerage. There may be long standing relationships."

Lukan said a manager's "strongest currency" on the street is his commission dollars. "He must allocate those commissions as wisely as possible," he added. "Convincing him to add a number to his speed dial is a difficult task." The relationship with Citco led to an upgrade in Quaker's trading technology platform, while the desk has doubled to handle anticipated growth. (The desk handled some 11 million shares in the 12-months ending March 31, according to Nasdaq. That represented about 15,000 trades.) A new flat-panel based trading system was recently installed at Quaker.

Lukan says times are hard for small trading firms that can't afford critical technology. "Prior to our acquisition, Quaker had a manually intensive trading desk and a separate systems for each execution avenue," he said. "For example, we had separate REDI PLUS terminals which allowed DOT access to the NYSE and OTC execution."

Lukan adds that the firm also had Instinet terminals as well as the Nasdaq terminals that allowed it to access the Nasdaq trading platforms as well as other ECNs such as Archipelago.

"We also have 10 to 15 direct wires to independent floor brokers on the NYSE and AMEX," he added. "It was a cumbersome system and difficult to give a customer a fast report with his average price."

Now, with Citco's money behind it, Quaker looks like a different firm. "We are now essentially a paperless desk," Lukan said. "I estimate that we can handle double or triple our current volume without sacrificing execution quality."