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February 1, 2013

Thinking Small

Institutional Brokerage Cantor Fitzgerald Targets Retail Orders

By Peter Chapman

You have to crawl before you can walk.

That's the philosophy of trading industry veterans Jim Smyth and Peter Gallo, as they lead institutional brokerage Cantor Fitzgerald into wholesaling, the business of servicing retail brokers.

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"This is not a business that happens overnight," said Smyth, head of the newly formed equity broker-dealer group at Cantor. "Management made a strategic decision to build a retail broker-dealer execution business. It takes time for clients to trust you enough to have a direct connection to you. It's a 'show-me-proof' business. You earn the next trade by doing the job on this trade."

Cantor is a powerhouse when it comes to servicing buyside trading firms, employing a small army of sales traders in the major cities to take care of customers. But with the institutional equities business in a slump, Cantor, like several institutional brokerages, made a decision in 2011 to take its existing trading capabilities and begin to service retail broker-dealers.

Yet in wholesaling, where it will make matches for the brokers' orders, it will contend with a formidable set of entrenched players, such as Knight Capital Group, Citadel Securities and Citigroup Global Markets.

Do they have what it takes? Cantor executives would not admit to possessing a "secret sauce," but chief executive Shawn Matthews told Traders that "as a 68-year-old private partnership, we believe we have a significant competitive advantage, being well capitalized and not participating in high-frequency proprietary trading."

 

Salesman and Techie

To get the job done, Matthews is relying on Smyth and Gallo.

See Sidebar: Another Way to Get Order Flow

Smyth spent nine years running the broker-dealer, or wholesaling, business at Knight, which reported $549.1 million in revenues in his final year with the unit.

He was recruited by Gallo, Cantor's head of electronic trading and architect of the group's new market-making system. Gallo joined Cantor in August 2011, after a lengthy technology career at Bear Stearns and in technology and sales in Citigroup's wholesaling division.

In their current gig, Smyth is the salesman and Gallo is the techie.

"Cantor is looking to expand beyond institutional equities," Gallo explained. "Management recognizes that you can't focus on just one thing. You have to offer more."

That's an understatement. Until 2003, Cantor was best known as a stock brokerage for institutions. But, in the wake of 9/11, when Cantor lost 658 of its 960 New York employees in the World Trade Center attacks, the nearly 70-year-old firm has been hell-bent on expanding.

Cantor has moved into fixed income sales and trading, asset management, investment banking, market data, energy trading, high-yield debt sales and trading, emissions trading, bank loans, prime brokerage, sports betting, emerging markets trading, risk arbitrage, exchange-traded fund arbitrage, stock loans, clearing services and other businesses.