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September 1, 2010

The Retail King

By James Ramage

Separating market and limit order flow has been significant for Ameritrade. The firm began the practice several years ago. Then, it still sent its market orders to wholesalers, but it began sending its limit orders to the exchanges--to take advantage of their rebates from maker-taker pricing. In share volume, Ameritrade has an almost equal number of market and limit orders, according to the firm.

In splitting its order flow, Ameritrade could improve its revenues by taking advantage of maker-taker pricing at the exchanges and still get paid for sending order flow to the wholesalers. Nagy, though, would not disclose the revenues Ameritrade registers from the make rebates it earns from exchanges, or the payment for order flow it receives from wholesalers.

The practice has also translated into a tremendous amount of volume that wholesalers no longer see. But there is little they can do about it, said Stephen Kay, who oversees broker-dealers client relations at Knight, which has a giant market-making business.

Stephen Kay, Knight

"We've noticed it," Kay said of Ameritrade's bifurcation strategy. "It's just competition, the nature of the business. Order routers are very good at what they do, in terms of maximizing their order flow for the client."

Now, for options, Ameritrade wants to separate its market and limit orders, as well. The firm is going through the process of gaining memberships with all eight of the current options exchanges, Nagy said.

Such innovations are nothing new. Nagy's been in the securities industry for more than 25 years. But his rise to retail royalty began at the bottom and in the back offices. Similarly, his unassuming beginnings and childhood heralded little of what was to come.

Nagy was born in Flint, Mich., and grew up in Phoenix. His parents had moved to the U.S. from Hungary in 1956. They were among the 200,000 or so Hungarians who fled their homes that year during the Hungarian Revolution. Nagy's parents raised him to speak the mother tongue; he learned English when he was 5.


A Hunger for Trading

Ellie Tweed, a broker for Shearson Lehman and the mother of a college roommate, first piqued his interest in trading. Tweed taught Nagy to trade options. Hooked quickly, Nagy was soon squeezing in Union Carbide, Clorox and Philip Morris options trades into his days of chemistry classes and his nights working at a grocery store.

In short order, trading took over whatever free time he had. But it wasn't nearly enough. Nagy hungered to learn more--only not in school.

"I figured, I'm studying chemistry in school, but it doesn't really give to my passions like [trading] does," he said he remembered thinking. "This is just so fascinating. I really want to get into this business, like right now."