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February 16, 2007

Another Summit to Climb

Successful in Equities, Wholesaler ATD Now Looks to Crack the Code in Options

By Peter Chapman

Tim Brennan built his first automated options trading platform back in 2000, when he was a trader with Morgan Stanley. At the time, he was part of a team preparing the big brokerage for the brand-new world of electronic trading at the soon-to-be-launched International Securities Exchange. Flash forward seven years and Morgan Stanley is one of the largest options dealers in the country, and one of only seven primary market makers or specialists at the hugely successful ISE.

As for Brennan, he's at it again. This time it's at Automated Trading Desk, a successful equities wholesaler. ATD hired Brennan last year to build its options market-making platform and steer the firm into the business.

The difference between then and now is that now the game is a whole lot harder. "The players aren't all new anymore," Brennan tells Traders Magazine. "That used to be the case. Today you have to be a little smarter. The competition is tough."

In 2000, when Brennan was working with the quants and systems professionals at Morgan, the barrier to entry was high from a systems-and-cost perspective, he explains. But it was "not nearly as high from an intellectual capital perspective."

"Today you must have a very solid idea of what you are using your prices for," Brennan says of quoting, "and offer a value-added proposition. And I believe that is what ATD will offer."

Hired Gun

Brennan is something of a hired gun in the options industry. Since leaving Morgan Stanley three years ago, the former trader has taken the lead in the options initiatives at three small shops.

His first stop after Morgan (where he spent a total of 17 years) was Citadel Executions Services, the broker-dealer arm of the large hedge fund. He joined the Chicago-based firm in early 2004 and focused on the business end of things, dealing with exchanges and customers.

Then, in 2005, Brennan moved to a small institutional brokerage called Fox River Financial Resources, also in Chicago, where he spent six months working on the build-out of its automated options market-making platform.

He joined ATD last March and is now one of three executive vice presidents reporting to chief executive Steve Swanson.

Back in 2000, when Brennan first began building a trading system for Morgan Stanley, ATD wasn't even a speck on the market-making landscape. It was a prop shop trading equities on electronic communications systems for a handful of investors out of offices in South Carolina.

In early 2003, though, it made its move, applying its trading and technology savvy to the business of making markets in Nasdaq stocks for retail brokerages.

The timing was not propitious. Decimalization had recently kicked in, cratering spreads and the profits of many old-line wholesalers as well.

But ATD persevered and eventually prospered. The 100-person broker-dealer is now one of the 15 largest equities trading houses, according to data from Thomson's AutEx BlockDATA service and Nasdaq.

Rapid Climb

AutEx reports show ATD traded a combined 133 million shares in listed and Nasdaq securities per day on average in the last six months of 2006.

Those figures cover only trades in the top 100 securities, ATD says. Its broker-dealer unit is actually trading closer to 250 million shares per day in combined Nasdaq and listed flow.