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November 1, 2002

Terror in the Trenches

By Tom Taulli

Lou Scotti will never forget his first three months on the floor of the New York Stock Exchange. It was like being thrown into the lion's den. "The first three months was a blur," he said. "I had to stand up all day and learn to eat my lunch standing up. You get yelled at a lot. But I eventually got a comfort level. And I loved it."

Since 1999, Scotti has been the senior buyside trader at Watchpoint Partners, a hedge fund based in New York City. The firm specializes in small and micro-cap issues and, as a result, mostly trades on the Nasdaq.

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After graduating from college, he knocked on every door on Wall Street and was able to land a job as a reporter on the floor of the American Stock Exchange. Several years later, he became a specialist clerk for options. From there, he spent four years on the floor of the NYSE.

During these four years, he was also able to get his MBA in finance from Pace University. "During the day," said Scotti, "I was trading stocks. At night, I was going to school. It was an interesting experience."

But it was also an experience that paid off. "By far my experience on the floor has been invaluable," Scotti said. "It is the place to be if you want to know how Wall Street works." It is all about real life. "You understand the lingo and you become a whiz at math," he added. " If you sit and say ah,' your head will get ripped off."

Scotti credits his sellside experience for making his task easier at Watchpoint. "The sellside experience has been a great help," he said. "But I also realized that I enjoy the buyside more. On the buyside, I have more influence on the execution of the trade."

At Watchpoint, Scotti has a junior trader. In all, the firm places about 100 trades per day, which can range from 500,000 to three million shares. There are four portfolio managers and three analysts. Being a relatively small entity, there is strong communications in the organization. "All orders are sent to me and the junior trader by instant messaging. So, I have no excuse saying I didn't get the order," Scotti said.

Scotti has a large degree of latitude on the trades. "I will use technical analysis to get entry and exit points on a trade," he said. "I also look at the overall psychology of the market and tend to go against the crowd. In this business, you need an edge."

In working with the sellside, Scotti uses several strategies. First, he wants information. "I don't want a trade to be placed and just get a confirm on it. I want to get some information on how the trades are progressing and if they have some ideas on best execution." Next, he likes to deal with senior traders, especially on big trades. He believes rookie traders often get "walked over by the Street."

For NYSE trades, Scotti is not convinced about direct access trading. "You might get fast execution and good pricing, but you don't get good information in the process. Besides, commissions in general have been falling. I'd rather use upstairs brokers."

A big part of the strong performance of the Watchpoint fund has been short selling. "We have seen a lot of opportunity on the short side," Scotti said. "Multiples were too high and the fundamentals weren't there."

What are the issues on the trading side for short selling? According to Scotti, it is mostly about education. After all, there are a variety of rules that can make it difficult to place a short sale trade, such as the uptick rule. "The uptick rule is our biggest problem," Scotti said. "Although sometimes we may have difficulty in locating stock to borrow for the short sale," he added. "But we have good relationships with our primebrokers to help us with that."