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September 1, 2010

The Retail King

The Strategy Behind Wall Street's Most Sophisticated Order Sender

By James Ramage

In a converted 1960s shopping mall in Omaha, Neb., sits one of the most powerful retail brokerage order providers, with what many consider the industry's most sophisticated routing system.

TD Ameritrade's order routing business resides in a two-story, 500,000-square-foot space that once housed a Younkers department store. The group that seeks best execution is headed by Chris Nagy, whose office window faces several outlying desks in a sea of workstations under a dreary fluorescent-light glow.


See Chart: Retail Kings

See Chart: Where the Flow Goes

See Sidebar: Flash Trading's Big Fan


At its peak, the space contained 1,500 desks, the foundation of Ameritrade's call center. Today, about half of those workstations sit empty. Their former occupants have relocated to a newer, more colorful and stylish workspace at Ameritrade's Old Mill campus west of downtown Omaha. In a couple of years, Nagy, Ameritrade's head of order strategy and co-head of government relations, will join them in a brand new 12-story office that's under construction.


Considerable Influence

But nothing of his current office space or its surroundings matters to Nagy, or speaks to his intimate knowledge of how the markets work. What matters is the mission he's undertaken: advocate for the retail investor. He's given himself and his group the task of securing the best possible prices and trading experience for each of Ameritrade's 8 million customers.

But on Wall Street, advocacy alone does not confer royalty. Volume does. And behind Nagy and his group, Ameritrade directs more order flow to wholesalers than anyone else in the retail brokerage space, according to Sandler O'Neill + Partners, an investment bank and a research boutique.

Ameritrade said it represents:

*10 percent of all volume in options cleared through the Options Clearing Corp.

*More than 50 percent of all retail options volume

*7 percent of total equities volume at both the New York Stock Exchange and Nasdaq

*40 percent of all over-the-counter equities volume

What's more, Nagy's potential to redirect Ameritrade's order flow gives him considerable influence with his trading partners. He uses his de facto position as the voice of the retail investor to lean on market centers--wholesalers and exchanges alike--in order to ensure that their execution policies are consistent with keeping the markets as fair and transparent as possible for retail investors.

Nagy also speaks on panels, such as his recent appearance before the CFTC-SEC Advisory Commission to discuss the events of May 6, more commonly known as the "flash crash." And he writes comment letters to regulators, such as two recent dispatches to the Securities and Exchange Commission on flash orders and the consolidated audit trail.

For this, he enjoys almost rock-star status on Wall Street. He is visible. He speaks publicly with confidence. But he carries himself without a rock star's outward display of vanity or flash. And yet still, it's common for wholesale market makers and regulators to hang on Nagy's every word.