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June 1, 2010

Old Friends

By Michael Scotti

Recently I had the pleasure of running into a veteran trader and longtime acquaintance on the train platform. We eventually discussed the so-called flash crash on May 6. He explained that when the Dow dropped 650 points, he called his portfolio manager. He left a message on his cell. Then the market dropped another 150 points. As we now know, the market rebounded. Later that day, the PM called back and asked the trader what happened? The trader's reply was undoubtedly repeated by thousands of traders at hundreds of trading desks across the country: "I don't know."

Michael Scotti, Editorial Director

No one wants to tell the boss that he's in the dark, but even regulators and exchanges were short on answers. In this issue, our columnist Dan Mathisson looks at those events and potential remedies. Always a good read, his column should answer some of your questions.

There is also a feature on Austin George, a former T. Rowe Price head trader. A trading business thinker, George sent a letter to this editor on May 5, one day before the flash crash. Although he retired in 1992, he remains a reader. George wrote that the business has changed so much, that he doesn't recognize it. "The trading lingo and the techniques of today might as well be another language," he wrote.

Algorithms, high-frequency trading and dark pools are Greek to him. But George traded when cultivating relationships with brokers mattered. He recounted when a local company's stock fell out of bed. T. Rowe wanted out fast. George said "I called in every IOU I ever had." That day, broker capital was a savior. And apparently it still is today--particularly for the biggest clients of brokerage firms. This month's cover story examines the rise in capital commitment, which is up about 11 percent in 2009 at the biggest payers and represents 29 percent of their trades by dollar volume, according to a recent Greenwich Associates study.

We kept hearing from some traders that the capital business had become very competitive again. Indeed, Greenwich's numbers confirm what we would have reported anecdotally.

The humorist Will Rogers would have undoubtedly had a quip about capital commitment, like he did about real estate--no one is making more of it.

Of course, capital is different. If you're a large client, ostensibly there's plenty available. As much as trading evolves, however, some things never change. As George knew that day when his stock plummeted, when there's no natural liquidity, the only counterparty that can buy your stock is a broker with capital. Have a great summer.


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