Education of a Block Trader
Traders Magazine, August 2011
The decision to cut back on broker capital was an easy one for Joe Scafidi, when he had to make it not long after joining Brandes Investment Partners as head trader in 2007. "I thought we were using way too much," said Scafidi, who spent nearly 20 years at bulge bracket shops in New York.
When he arrived, the San Diego-based manager used broker capital on more than 30 percent of the notional value of all trades. But then the business changed. Today, Brandes is down to less than 5 percent. A major part of that reduction was basic economics: The Street's risk profile has changed, not to mention that managers themselves have fewer assets and are trading less.
But less capital is a win-win, Scafidi says. With little if any loss ratios-4 percent is its largest-brokers make more money and Brandes doesn't impact its usage of services from the Street. Besides the firm's research relationships, Scafidi sees the value of sellside desk intelligence as it relates to flows and stock movement. "If you want to make a difference, entry and exit is so key in portfolio management," he said.
The Brandes desk will seek sellside insights to decide its participation level in certain trades. "We might be 5 percent of the volume or 25 percent, but we make those decisions to a large degree based on our dialogue with the sellside," he said.
He puts a high value on sellside services and the give and take in the relationship: "Our goal is to extract as much value from the sellside as possible, while maintaining a great relationship."
Scafidi, who co-headed U.S. equity trading at Banc of America Securities, spent most of his career trading international stocks. He ran ADRs at several shops, including Deutsche, Dresdner Kleinwort Benson and Morgan Stanley. Scafidi's international background prompted former Brandes head trader Vince Palma to recruit him. About 75 percent of Brandes' assets are overseas.
Managing relationships is a necessary skill on the sellside. But it is just as important on the buyside, Scafidi says. "I work as hard at maintaining relationships today as I did when I was on the sellside," he said.
Toward the end of his sellside career, Scafidi was thrust into more of a client relations role when the buyside moved to sector trading and began talking directly to position traders. That experience comes in handy today, because he could be dealing with three different desks around the world at the same sellside firm. "I have to remind them that we are a global customer," he said.
During his days on the sellside, Scafidi learned to understand the difference between picking stocks and executing orders-each requires different skills. It's important for portfolio managers and traders to understand that difference, he says. At Brandes, the six traders are given the leeway to trade, and that suits him just fine.
Referring to himself, but likely to his desk as well, Scafidi said, "I'm not a stock picker. I have a sense of how to trade; I know my levels and I know markets. That's my skill."
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