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February 1, 2003

Amex Critic Who Found Another Option

By Editorial Staff

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Want direct access to the American Stock Exchange? Sam Lek's ROX front-end will get you there, but the brokerage exec doesn't recommend the exchange.

Lek, founder and president of direct access broker Lek Securities, lost a legal battle over a busted trade with the Amex in 2001 and relinquished his membership. Lek claims that all too often Amex specialists bust trades they find unprofitable.

So, now, if Lek gets any "non-directed" orders, or those in which he picks the trading venue, for Amex securities, they go to ECNs, market makers or elsewhere.

There's irony here. Lek got his start in electronic direct access as an options market maker on the Amex in 1989. His frustration in trying to complete quick hedges on the New York Stock Exchange led him to develop ROX in 1992. Initially an electronic gateway to the New York Stock Exchange's DOT order routing system, ROX has blossomed into a full-blown direct access system.

Since 1993, Lek Securities - then known as Lek Schoenau - began to transform itself from a trading house into an agency brokerage. That year it became an NYSE member. By 1996, it had ceased making markets. The agency business was more profitable and revenues more stable.

Initial ROX users were other options market makers and regional specialists. These were pros who needed fast access to DOT. Then came the block desks, which included Cantor Fitzgerald. Now, Lek is targeting hedge funds and other money managers. About 15 percent of its 300-plus clients are European.

Lek's chief competitor is probably the REDIPlus division of Spear, Leeds & Kellogg. Both are similar. Unlike many direct access providers, such as the popular Lava Trading, both are self-clearing brokers not just software vendors. Also, few are as old as Lek and REDI and few got their starts catering to listed traders.

Lek has a staff of about 30 and handles between 20 million to 30 million shares per day. A slight majority of those shares are listed. The firm became an NASD member in 1996 to accommodate the surge in interest in Nasdaq, but its founder sees trading interest swinging back to New York names. Traders Magazine technology editor Peter Chapman spoke to Lek about trading electronically on the New York Stock Exchange.

Traders: The New York Stock Exchange's auto-ex initiatives, Institutional Xpress and Direct+, have not been big hits. But we understand the exchange is planning to introduce a new auto-ex "Liquidity Quote" that off-floor traders will be able to access. How do you suppose it will fare?

Lek: The Xpress quote has not been a big success. Although there is a need for a liquidity quote - being able to buy more size - an Xpress quote only becomes expressable if it has been there for more than 15 seconds.

Traders: It must be for at least 15,000 shares and on the book for at least 15 seconds?

Lek: That's right.

Traders: But when a quote of that size does hit the book, it rarely remains there long enough?

Lek: Right. Also it must be the NBBO.

Traders: How will this new feature help?