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March 10, 2009

Before the Fall

By Peter Chapman

Orders sent to the New York incurred both exchange fees and specialists' charges. Madoff, on the other hand, charged no fees. That was part of his appeal. Prior to the Crash of '87, NYSE member firms balked at sending their orders to Madoff out of loyalty to the exchange or fear of retribution. Afterward, those qualms vanished.

To sweeten the deal, Madoff started paying brokers for their flow. That made it even harder for cash-strapped brokers to resist the trader's entreaties.

"If you sent it to the floor of the New York, you got charged for it," Green explained. "If you sent it to Madoff, they paid you. For many, it was a no-brainer."

Hard Times
With hard times on Wall Street, the Third Market began to take off. According to a Wall Street Journal report, the share of trades in NYSE-listed securities under 1,100 shares done in the Third Market tripled between 1984 and 1989 to 6 percent. BMIS accounted for 70 percent of that figure, according to estimates of the exchanges. The surge left the New York Stock Exchange with only about 66 percent of all trades in its stocks, down from 87 percent in the late 1970s.

"The New York Stock Exchange looked at them as serious competitors," remembered Chris Keith, the Big Board's former chief technology officer and a member of the exchange's executive committee from 1980 to 1988. "The Madoff name was well known at the exchange and the firm was a not infrequent topic of discussion in meetings. He was highly regarded."

Meanwhile, over at the NASD, Bernie had reached the apogee of his relationship with the organization. In 1986, he was elected to the board of governors along with 39 others. He was also on the executive committee, the board surveillance committee and the long-range planning committee. He was chairman of the NASD's international committee, too, having recently opened an office in London to trade ADRs.

After more than 25 years in the business, everything was finally falling into place for Madoff. In 1989, the firm had 20 traders dealing in the top 250 NYSE-listed names. It was handling about 15,000 trades per day, totaling about 5 million shares. That gave it 2 percent of the share volume in NYSE-listed securities. By the end of the decade, BMIS boasted 100 customers including regionals such as A.G. Edwards, Dain Bosworth and Rauscher Pierce and discounters such as Schwab, Quick & Reilly and Fidelity.

For the most part, BMIS had the growing market to itself, but that would not last. In 1985, a veteran manager at several wholesalers started a small third-market dealer in White Plains, N.Y., called Trimark Securities. Steve Steinman, Trimark's founder, had held trading positions at a number of firms, including Troster Singer and M.H. Meyerson. Trimark was not much of a factor in the late 1980s, but was digging in. In 1990, the dealer signed an agreement with TCAM to build a trading system.