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January 13, 2009

Knight's Joseph Mazzella Discusses ....

By Editorial Staff

Joseph Mazzella, who oversees the listed block trading desk for Knight Equity Markets, spoke to Traders Magazine about trading in volatile markets.

On market color

As some larger firms have struggled, cuts have come from everywhere: sales traders, fewer services, less color. And if you have 1,500 to 2,000 market participants whom you talk with daily, and you had, say, 100 guys covering those accounts, and now you have 75, and then 50, you're spread too thin.

Well, if you're spread too thin, you're going to shove as much as you can into the machines just to keep processing the order flow. And when you do that, you're not in tune with the market. You don't have as much color or flavor on stocks in the overall market, and what stocks are going to do, and what individuals are going to do.

Some larger firms pull back because, as head counts diminish, it's tough to service a guy the way you once were able to. Fortunately, that hasn't been the case here.

On high-touch versus low-touch at Knight

What happened is the pendulum swung big-time to the low-touch side. And it was pegged there for a while. Algorithms are great, and there's a place in the market for them, and there always will be. But the buyside wants that human interaction, that dialogue, especially in these times where any little bit of color can be beneficial and can help you implement the trade better. We've seen that pendulum swing from the low-touch side and come back to a more neutral stance.

[Of Knight's total global markets revenues, high-touch accounted for 51 percent, and low-touch 49 percent, through the first three quarters of 2008. Since 2002, Knight's low-touch business has made steady gains from 6 percent of revenues]

When volumes start to come down and the markets start to calm down, the buyside is able to source liquidity themselves instead of using the sellside. The pendulum is going to swing back. We can't stay at these historic levels forever. It's going to normalize. Fortunately, I think it's going to normalize pretty soon-sometime in early 2009, definitely.

On committing capital in high volatility

When volatility is at its high-which it has been for a prolonged period of time now-instead of selling an individual 250,000 shares, or 500,000 shares, you sell them 100,000, or 200,000. You've got to get a little bit smaller. We don't want to disadvantage our customers. We want to be the partner they expect us to be. We want to make tighter markets. If the inside quote is $10 to $10.02, instead of offering him 250,000 at $10.05, we'll offer him smaller, but tighter. We'll offer him 100,000 shares at $10.02. So, what you end up doing in times of high volatility is you end up making smaller, tighter markets. You still have the same price risk because of the volatility, but you have less share risk.

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