Boosting Securities Lending at Quadriserv

Former Nasdaq exec applies lessons from OTC years

Former Nasdaq and CIBC World Markets trading executive Bruce Turner was once part of the solution that helped over-the-counter equities become more efficient. Now he hopes to do the same for securities lending. Turner, a rabid Boston Red Sox rooter, likes underdogs who overachieve. His journey has taken him from one of the biggest trading houses, CIBC, to a relatively small securities lender, Quadriserv. He says he likes the challenge of serving a niche business at a small firm.

In an interview with Traders Magazine, Turner says he now has a chance “to remake a business.” Turner, who serves as managing director and chief operating officer at Quadriserv, thinks he will once again have a chance to make as dramatic a difference as he did with OTC.

Quadriserv was founded in 2001 by a group of prime brokerage veterans. It offers a broker-neutral securities lending platform.


So at a time when many securities lenders’ clients are calling for an electronic market place that will save them from paying dearly whenever they need an illiquid stock, Turner is attracted to securities lending because he thinks his firm will move the market toward more efficient electronic standards, he says. “Securities lending is exciting because it’s the convergence of a few different opportunities. These include improved technology, the creation of a tradable asset class and a general chance to improve the quality of markets for public investors.”

He says Quadriserv is offering services that will persuade hedge fund managers that securities lending isn’t a rigged game. Turner has a daunting task ahead of him. According to a recent report by the consulting Vodia Group, 27 percent of hedge fund managers believe they “are overcharged on securities lending rates by their prime brokers.” And 77 percent of poll participants say they want securities lending to become electronic at a time when much of the business is done by phone.

Some may be reminded of Nasdaq in the 1980s. That’s when Turner began his career with stints at Oppenheimer & Co. and Salomon Brothers. This is where Turner hopes his expertise, running trading desks and spending a year at Nasdaq overseeing SuperMontage, will be useful.

Turner says Quadriserv is seeking to connect lenders and borrowers “in more innovative ways.” Transparency, in and of itself, will not improve the securities lending business, he says. “Borrowers need a way to find the intrinsic value of a daily stock-lending rate and borrowers need to find the true cost of their shorts,” he says.

It’s Coming

Turner also acknowledges that many securities lenders expect that some form of electronic-screen-based trading is inevitable, a sentiment supported by the Vodia Group report.

“Most participants ultimately accept the ascendancy of electronic bid-ask markets but few custodians or brokers want to be the first to embrace them,” the report says. The report predicts that brokers will open up electronic markets to a range of hedge funds “very shortly.”

Quadriserv hopes to solve many of these problems with ProQure, its Web-based application service designed for both lenders and borrowers of securities. Those include hedge funds, long-only funds, 130/30 funds and custodians. The service also has historical data so that managers can see what has been happening in the stock loan rebate market.

Lenders pay an agreed-upon rebate rate on the cash collateral received in stock lending. An agreed upon rebate rate for transactions is based on the Federal Funds rate and is adjusted daily as the rate changes. This is important, Turner adds, in convincing hedge fund managers that they can receive fair value in securities lending.

“We want people to see what is happening in the loan rebate market for a security. You can see that the rate changes based on corporate action or the fundamentals of the stock, etc.,” Turner says.

This is not a complete screen-based-electronic lending service but it is a step in that direction, Turner points out.

Still, Turner says the industry shouldn’t make a fetish of screen-based, electronic lending. Instead, he says it should focus on ensuring that hedge fund managers and others using securities lending can understand how rates frequently move.

ProQure will help the client find the hard-to-borrow stock, increasing the number of transactions and creating volumes of scale, he predicts. Securities lending, Turner ultimately hopes, will follow the same path as Nasdaq trading.

Declining Costs

Turner says the Nasdaq issues saw transaction costs decline dramatically. “If more people come into a market because they have a better sense of execution capability and insight into it, then the market will grow,” Turner says. He hopes his extensive experience in trading OTC issues will help.

Turner, 43, developed an expertise in market structure during various stops in the trading big leagues, including Salomon Brothers/Citigroup, which went from a 25-person trading desk to 125 as the firm evolved into a unit of Citigroup.

By the time he left Citi, the desk was trading about 1,000 Nasdaq stocks. Besides running the desk, he was also responsible for the development of new trading products. At Salomon/Citigroup in the late 1990s, Turner was also investigating market structure technology issues in Nasdaq trading and looking at execution issues in general.

The late 1990s was a time of dramatic regulatory changes. It was the time of the order handling rules. Trading executives had to cope with massive technological change.

“I felt like I understood it and I had interesting thoughts and theories about how it should work,” Turner says.

So Turner, during his Citi stint, developed an expertise in how the OTC market would become electronic. He was put on Nasdaq’s Quality of Markets committee. The committee developed Nasdaq’s trading rules and technologies.

After that, he was recruited by the exchange to take over a high-profile project. At Nasdaq in 2001, Turner ran SuperMontage, which was supposed to be a next-generation trading system. It was designed to replace the Nasdaq Workstation II, by attracting more liquidity to the market. SuperMontage was an order display and execution system that was going to give traders the best, most up-to-date, information from multiple parties, including market makers and ECNs.

But Turner stepped into the middle of a debate over whether Nasdaq, which was in the process of separating from its regulator parent, the NASD, was using the SuperMontage to exert monopoly power. Nasdaq and its competitors waged regulatory war.

Some arguments were over “arcane” issues such as order delivery versus order execution for ECNs, Turner says. The debate resulted in an extensive amendment process at the Securities and Exchange Commission.


The reality is some of those amendments were probably filed to placate people,” Turner says. In the end, Nasdaq spent over $100 million to develop SuperMontage. It then scrapped the system when it got the Island ECN as part of its acquisition of Instinet.

But in the spring of 2002, Turner was recruited by CIBC to put his “thoughts and theories” into action.

Here was the chance to take much of the knowledge he had gained while working at Citi and put them it practice. In the spring of 2002, Turner began a four-year run with CIBC, running its U.S. equity and sales trading. There he supervised electronic trading, including program and direct- access trading. Yet after four years, Turner suddenly decided he needed to go back to school for an MBA “I wanted to expand my opportunities, and one of the ways was to further my education,” he says. He insists that he didn’t pursue his MBA because he believed his career path was blocked.

“I just wanted to round out my skills sets and get some other experience. This was a way of doing that,” he says. Now he hopes to combine his knowledge and education in an effort to help another underdog do what his beloved Red Sox have done over the past few years. And woe to those who walk away from his underdog.

Turner now uses his autographed jersey of Johnny Damon, who left the Sox to sign with the Yankees for big bucks, as a rag to wash his car.

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