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February 1, 2003

A New Nasdaq World Power? An online brokerage targets institutional business. Can the strategy work

By Gregory Bresiger

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The so-called online trading revolution fizzled out in the late 1990s and some firms have been trying to reinvent themselves since then.

When BrokerageAmerica began a few years ago, it was going to succeed as a market maker because it promised to provide the best Nasdaq executions to a new generation of computer literate investors.

The latter would benefit from a revolution led by BrokerageAmerica. The firm would charge no commissions on market orders for 1,000 shares or more, and give rebates to retail customers. In a bull market that appeared to last forever, in a market in which more and more people wanted to buy equities for themselves - in which market making appeared to be a license to print money - how could this strategy miss?

But it hasn't worked. "The retail investors have gone away and taken a back seat to institutional business," according to Don Camillo, president of BrokerageAmerica and the head of its retail operations.

Still, in an opinion piece written for Traders Magazine some two years ago, another BrokerageAmerica executive said that liquidity for market making would come from the expected huge retail order flow. That, along with other retail oriented strategies used by many market making firms at the time, didn't succeed.

Another Strategy

Now BrokerageAmerica, in the midst of re-inventing itself, is making a series of big bets on another kind of strategy. Still, its executives say there has been no change in the philosophy of the firm.

Nevertheless, it expects to become "a dominant institutional powerhouse," BrokerageAmerica executives say. And they promise that it will happen in the next year and a half. This is a tall order for a firm that wasn't even a player a few years ago. How is it going to do it?

It is investing millions of dollars in new offices and is hiring some of the best talent around, its executives say. The upstart trading firm plans to become a big league player by overtaking Knight Trading Group and others.

"There is no question that we are going to be bumping heads with Knight, with Schwab Capital Markets and with the old Herzog and now Merrill Lynch and with the old Spear Leeds, which Goldman Sachs bought," according to Drew Sycoff, chief executive officer and co-chairman of BrokerageAmerica. (The firm was spun off by Andrew Garrett Inc. about two years ago.) These big market making firms, Sycoff notes, were all built in "fat times." That, he claims, means they are stuck with huge costs.

"We are dramatically expanding. Our expectation is to be one of the largest institutional market makers and wholesalers within the next 18 months," he said. Later he added to his statement, specifying that BrokerageAmerica will pass Knight.

Knight declined to comment when contacted by Traders Magazine.

"Knight was built in the glory days. They have a lot of fat in their model," Sycoff said. BrokerageAmerica's success, Sycoff added, will come as a big liquidity provider to institutions. The process has already been taking place. At the end of 2001, it had about 125 institutional accounts. One year later that number had grown to around 700.

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