When it comes to U.S. presidencies, the second term is usually when the trouble starts: Watergate, Iran-Contra, Monica Lewinsky, the unraveling of Iraq and the Wall Street bailouts. Patrick Armstrong is the first president of the Securities Traders Association of New York to hold the office for two consecutive terms. In his day job, he is a managing director of Prime Executions, the agency-only broker, and he is overseeing the opening of a new office in San Francisco. Traders caught up with President and Governor Armstrong-he was named a governor of the STA recently-and asked for his thoughts on what worries his clients, the rumbling of new rules and regulations coming Washington, D.C., and how the relationship between the buyside and sellside has evolved. One thing is clear: The coming year looks like a busy one for the 41-year-old Armstrong.
TRADERS: You’re the first president to have back-to-back terms at STANY. Can you tell us what you want to accomplish this year as president?
PATRICK ARMSTRONG: I’ve taken on a couple of new roles this year. I’ve also been elected to an STA governorship as well, so I’m balancing the national me versus the New York me. On top of that, I’ve just transitioned out to San Francisco, where I’m opening a West Coast office for PrimeEx, and I’ve put it to my constituency. I knew I was going to be moving and it was going to be difficult to maintain my New York relationships, but they insisted on having me continue. So, I travel back once a month for a week or so, and continue to keep moving the organization forward.
TRADERS: Besides the weather, why is PrimeEx opening an office in San Francisco?
ARMSTRONG: We think there’s a lot of opportunity out here. Being a traditional New York Stock Exchange-based firm, we just feel like the message gets lost by the time it gets out to the West Coast. There are big opportunities to get some business from the West Coast.
TRADERS: Is private equity a spur for this?
ARMSTRONG: No, this is all traditional broker-dealer and research.
TRADERS: Back to STANY: What’s the difference between a governorship and a presidency?
ARMSTRONG: So, the presidency is obviously leadership of the board in New York. An STA governor is just that: I’m on the board of the national board. The STA is a bottoms-up organization. The strength comes from the affiliates. New York, being the largest affiliate, obviously has a big role in the STA, but the STA in general has done some great work in Washington with the S.E.C. and with congressmen and senators in getting the message of some of the issues of market structure out there.
TRADERS: What are the top three issues for STANY and its members in 2014?
ARMSTRONG: Certainly one of the big issues that everyone’s talking about is the tick size and the subsequent study. The devil will be in the details. I am for the study, and it seems to be the majority is for the study, but not everyone is, that’s for sure. There’s definitely two sides to that coin.
TRADERS: What are STANY’s thoughts on the tick size study?
ARMSTRONG: I think that a lot of our good constituents on the retail side began to feel that mom-and-pop investors are better served with always having a penny spread to keep their costs down. That said, I would remind them that mom and pop also invest in mutual funds as well, so the institutional players need a level playing field.
TRADERS: What other issues for STANY will be hot in 2014?
ARMSTRONG: The propsal by Rep. Dave Camp (R-MI) for options-that still seems to be on the table. I don’t know why. We were pretty outspoken about this last year. We just don’t see how that proposal makes sense for option volume. It just seems like unreasonable taxation. And the Volcker Rule continues to evolve and come out, and it’ll be interesting to see how it affects business overall.
TRADERS: Why is there still uncertainty around Volcker?
ARMSTRONG: It seems like they’re still fine-tuning it, and when there’s fine-tuning done by the S.E.C, there’s always repercussions that ripple throughout the industry.
TRADERS: Is it because these rules are fairly broad or because no matter how noble the rules are, once they hit the reality of the trading floor, they fall apart?
ARMSTRONG: Yes, especially when firms are trading their own money. I’m an agency-only broker; it’s really not going to affect me as much. Those types of brokers it won’t affect. But when a significant portion of your business is trading your own firm’s capital, I think it will affect you in some way, shape or form, and that could shrink profits and change the broker-dealer industry.
TRADERS: We now have a new chairperson, with Mary Jo White at the helm of the S.E.C, and they are very serious about prosecuting fraud.
ARMSTRONG: Yes. Mary Jo White’s background is one of a prosecutor, and one of the biggest questions I had was, “Will she have the background and the understanding to attack market structure?” But everything that she’s done, she’s stepped into the position and she has impressed me. I think she’s asking the right questions. She spoke at the STA national event in October, and she will be speaking again this fall at our Washington, D.C., event. I think that she’s moving as fast as she can given the circumstances.
TRADERS: What concerns are you hearing from STANY members? What keeps them up at night?
ARMSTRONG: Truthfully, one of the challenges in our industry has been employment.
TRADERS: Really?
ARMSTRONG: Yes, there are times when it feels like kind of a sick game of musical chairs, and you want to make sure you can find a seat. I hear people talk about that more than anything else. I think the contraction of our industry has forced many of my constituency into jobs where they wear many different hats, and everyone’s working four times harder for half the pay. No one’s really killing it out there right now in my industry.
TRADERS: We just saw a report that J.P. Morgan is thinking of laying off or cutting 8,000 jobs. Is that a sign of just how huge some of these firms are, that they can lay off these numbers, or is this just a sign of this economy?
ARMSTRONG: The economy, actually, I think is beginning to grow. I just think that that’s more indicative of what the financial industry is going through; while they’re going through a contraction, I think the economy is actually beginning to grow and will continue to grow.
TRADERS: When do you think Wall Street will start hiring again?
ARMSTRONG: There’s always going to be a need for people with unique skill sets in the financial industry, and people will have to continue to reinvent themselves. There’ll always be a need for people who improve their skills, whether they’re getting themselves first in data and technology or they’re working towards a master’s degree in finance or maybe getting their CFA. But as far as traditional entry entry-level jobs, I really don’t see that increasing in the near future.
TRADERS: How do you get the bright young things out of MIT and Stanford who want jobs at Facebook and Google?
ARMSTRONG: Well, you’re always going to lose a fair amount of people, the best and brightest, to the technology world, but I think the financial industry does fairly well at attracting high-level employees.
TRADERS: Let’s talk market structure. We’ve seen the buyside-versus-the-sellside relationship change in the past few years. The buyside is demanding a lot more; the sellside is either shrinking or moving resources away from the buyside. How do you think that’ll look in 2014?
ARMSTRONG: One thing that I’ve seen over the last two years in particular is, I’ve seen the buyside finally become engaged with both the S.E.C. and with itself in discussing some of the issues. That was dormant for a long time in the early 2000s, the whole decade from 2000 to 2010. I’ve seen a major shift in that area.
The buyside doesn’t seem to have the same demands for research like they once had. They internalize a lot of that now. I would also tell you that the sellside was much more valuable in the firm capital they put up in facilitating trades. Most buysiders would tell you today that they rarely ask that of their business, and the buyside is executing a lot more of their orders directly themselves.
That being said, the buyside can’t do it all. There’s always going to be a need for trusted relationships out there and people to keep an extra set of eyes on their positions and know what they’re doing. The people on the sellside who know how to truly service their clients are the ones that will come out on top.
TRADERS: Did the sellside allow that relationship to slip or did execution, services and trading technology become a commodity?
ARMSTRONG: Technology has played a big part in the fracturing of the marketplace, but technology has always been supposed to accent what the human being brings to the table, not replace it. It’s supposed to help us do our jobs better and not completely replace what we do. At the end of the day, you need to be able to trust the person that you’re handing an order to and make sure that they’re doing the right things to find you liquidity and do a proper job.
TRADERS: Last year saw a series of trading glitches and outages. Is this a concern for STANY members, or is it basically “the new normal”?
ARMSTRONG: Any time that we have an outage, anything that shakes investors’ confidence in the efficiency of the markets always gives everyone pause. It is a little bit of a new normal because we have so many different systems out there. Personally, I don’t feel like we need 60 trading venues to trade your stock. I don’t think that’s what they envisioned when Regulation NMS was drawn up. I think this is one of the reasons why the S.E.C. is going back and taking that holistic approach where they’re going to take a look at market structure again and see what makes sense and what doesn’t make sense. So outages give everyone pause, and we need to take a step back and look at what we’re doing.
TRADERS: What aspect of actual trading do you think will be addressed first by regulators or Congress? Is it going to be high-frequency trading or dark pools?
ARMSTRONG: Actually, the way that you address both of those situations is you examine the maker-taker structure that we have with order flow. The reason why HFT exists, or one of the main reasons, is because there is a rebate provided when you provide liquidity. If that were to be removed, HFT would disappear.
As for dark pools, there’s always been a dark market, whether that order was being held by a floor broker in 1970 or even 1995, whether he was standing on the floor and he knew that he had 400,000 shares to buy, but only he knew that. There’s always a need for the buyside to be able to effectively trust somebody with their order or trust the system with their order in which they can find and source liquidity. That’s always going to have a need.
I just question a number of these dark pools where a lot of HFT is present. If the average trade size in a dark market is 300 shares or 200 shares, it’s really no different than the lit market. So it’s not sourcing block liquidity like it’s meant to do.
Venues that source block liquidity and the dark markets, I say that’s worth something. Those are venues that source block liquidity that will not disappear, but the ones that aren’t sourcing blocks and their trade sizes are the same as the lit markets. I just don’t understand why they exist.
TRADERS: I noticed on your biography that you were thinking about going to medical school before working on Wall Street. Do you ever wish that you had been a doctor?
ARMSTRONG: That dream was left a long time ago. I went to work for the buyside after I graduated from college and I fell in love with our financial markets and especially the trading aspect of it. Initially, I went into it thinking I’d pay off my college loans real quick and get back in med school, but I found I had a passion for it, and I have never left. Now I’m excited to be bringing our business out to the west coast.
TRADERS: It sounds like trading is in your blood.
ARMSTRONG: Yes, that’s for sure.
THE DATA SHEET
NAME: Patrick Armstrong
AGE: 41
HOME: Grew up in Allendale, New Jersey
EDUCATION: Columbia University
FAMILY: Married for 14 years with a 12-year-old daughter and a 10-year-old son.
WHAT BOOK ARE YOU CURRENTLY READING?
“I’m studying for my CFA so I can’t afford to read a book. I have my Level 2 examination coming in June, so I’m very busy.”
WHAT WAS THE LAST MOVIE YOU SAW?
“I saw Frozen with my kids.”
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