A new team is ready for the major leagues on the equity-trading desk at First Union Securities in Baltimore. First Union is embarking on a transition from retail trading focused on value stocks, to institutional market making focused on mid-cap growth stocks.
On the way, the broker dealer unit of Charlotte's First Union Corp., the sixth largest bank in the U.S., hired and fired dozens of traders. The brokerage is also committing $150 million in capital and dropping market making in a third of the 465 stocks it had traded.
First Union Securities is no investment banking powerhouse but the 50-person trading team is being nudged in that direction by management, which is intent on joining the industry's elite.
Management
First Union's desk now comprises eight listed principal traders, 12 OTC traders, 10 OTC agency traders and 20 sales traders. There is an additional support team of 50 pros.
At the helm is Mickey Misera, a 19-year veteran of Alex. Brown & Sons and its successor firm under Bankers Trust.
His mandate: to build an equity capital markets group so that First Union's banking clients think of First Union first when they need to issue stock. The new strategy will be officially launched this month. Misera, a managing director and head of equity capital markets, oversees research, sales and trading.
The desk traded about 12 million Nasdaq and 4.3 million listed shares each day in February, according to Thomson Financial's AutEx/Block Data. Volume has been steadily climbing since the start of 1999. Due mainly to earlier acquisitions, volume is up fourfold since 1997.
Today, the equity capital markets unit occupies two floors in a skyscraper in the heart of Baltimore's swank financial district. Neighbors on the block include Alex. Brown (now part of Deutsche Bank), as well as Legg Mason, Ferris Baker Watts and T.Rowe Price.
Misera hired pros he knew and trusted. He selected his former boss at Alex. Brown, Mike Murphy, to run the trading room. Murphy had left Alex. Brown in the late '80s, spending the next decade in New York as a buy-side trader.
Most recently, he headed trading at Kerns Capital Management in the Big Apple. Murphy's right hand man is Chris Holter, who runs Nasdaq trading. He had the same job at Alex. Brown. Both are managing directors.
Others in the top ranks of the trading team are Jim Whelan, listed principal trading, and Tom King, sales trading, both Alex. Brown alumni.
Gale Force
First Union is obviously not short of Alex. Brown pros. Indeed, the transformation taking place at First Union owes much of its momentum to a raid on BT Alex. Brown, the firm created when Bankers Trust bought Alex. Brown in 1997. About one third of BT Alex. Brown's trading team, 30 traders and sales pros, were nabbed last summer by First Union.
The defection was probably the largest mass exodus of trading talent since a renegade group of traders and bankers bolted for Thomas Weisel Partners from Montgomery Securities. That occurred in 1997 when Montgomery Securities was acquired by Nationsbanc.
Misera and Holter say they were both unhappy at BT Alex. Brown.
"People left for cultural reasons," Misera said. "In general, they didn't like the idea of getting bigger. First Union gives us a chance to get back to where Alex. Brown was 10 to 15 years ago and do it all over again."
"The Alex. Brown years were spectacular," Holter reminisced. "The Bankers Trust years were not quite as good."
Clearly, the First Union trading unit has risen from the ashes of the former Alex. Brown desk. "When I first walked in here, I felt like I was back at Alex. Brown," Murphy said. Aside from his Alex. Brown stint, Murphy, has other strong ties in Baltimore. He owns a farm in the region.
Alex. Brown, an investment banking dynamo based in Baltimore and a blue-blood institution, produced leaders of the National Association of Securities Dealers. Former NASD Chairman Joseph Hardiman came from Alex. Brown, as did Nasdaq leader Alfred Berkeley.
The acquisition of Alex. Brown by Bankers Trust in 1997 was not fatal. As new owners Deutsche Bank officially acquired BT Alex. Brown last summer, the frenzy of activity apparently had not hurt the firm's equity trading prospects. (The new entity was named Deutsche Banc Alex. Brown.)
While the Bankers Trust acquisition unsettled many traders, the desk replaced most of the departing pros from an internal pool. In 1999, profits before tax on equity trading were said to be up significantly from the previous year.
First Union's Acquisitions
As Bankers Trust was buying Alex. Brown in 1997, First Union made the first of two acquisitions that would solidify its equity trading team. It acquired Richmond's Wheat First, sending shivers down the spines of potential rivals. The new entity was named Wheat First Union.
While the retail distribution capabilities of its 1,300 stockbrokers were important to First Union, the supporting trading unit at Wheat First ultimately did not fit First Union's profile as an institutional player.
Wheat First's value approach to research and investment banking was out of favor at First Union. Consequently, most of Wheat First's 11 OTC principal and 16 sales traders got pink slips. The eliminated slots were filled by ex-BT Alex. Brown pros. Ten OTC agency and eight listed traders from Wheat First stayed.
George Jennison, former head of Nasdaq trading at Wheat First remained as First Union embarked on its transformation. He works in the retail brokerage unit at First Union in Richmond.
Misera said the firings at Wheat First Union should not be mistaken for a purge.
"We simply looked at where the talent was," he said.
"The platform could not accommodate the way investment banking and the way the demands of institutions were moving," Misera said. "We needed a bigger, more institutionally-focused equity capital markets group."
Finally, First Union's acquisition last April of the Chicago retail brokerage, Everen Securities, added just a handful of traders to the evolving Baltimore shop, since most of the 40 Everen trading pros were axed. Everen, in fact, was primarily acquired for its large brokerage network.
The Customer Is Right
Misera denies that his firm is trying to replicate the success of Alex. Brown, a niche investment bank specializing in technology.
"We're not trying to replicate Alex. Brown," Misera insisted. "We're taking some of the lessons we learned there and layering them over the investment banking relationships that First Union has fostered."
Misera said First Union is trying to create a franchise in growth stocks. Those growth stocks, he contended, have been all but abandoned by technology-oriented firms, such as Chase H&Q, Robertson Stephens, and even at Deutsche Banc Alex. Brown.
These firms made their mark in mid-cap stocks, but they are increasingly focusing on larger names, Misera claimed.
Misera said that while firms like Thomas Weisel Partners are following a similar course, they do not have the broad array of products provided by First Union. These include high-yield securities, credit facilities and certain principal investment services.
Some experts, however, think technology-oriented firms like Robertson Stephens, should not be dismissed. Sure, the landscape has changed, said Marni Pont O'Doherty, a banking analyst at Keefe, Bruyette & Woods. These investment banks have been acquired by larger commercial banks. "But they are still in the same ballgame [as First Union Securities]," she said.
O'Doherty said First Union has chartered a sensible course but it still faces stiff competition from firms like Robertson Stephens. "First Union knows it's not going to start out winning all the deals," she added. "It has said it wants to be the co-manager of choice."
Market Maker
First Union is now the axe, or the number one trader as measured in volume of shares traded, in 50 to 75 stocks on Nasdaq, according to Holter. "We want that number to become 150," he said. "We don't want to dominate Apple. We're picking mid-cap names where we can add value. We don't want to be the tenth research call. We want to have a value-added research call."
Holter said that in the past month, First Union has added 20 names to the list and will add more in the months ahead. Overall, however, the desk will make markets in fewer stocks. "Wheat First used to trade a lot of stocks [on a retail basis]. We've trimmed a lot of those out," Holter said.
First Union said it will facilitate block trading with the commitment of $150 million in capital. "We will use capital as a tool," Misera said. "It won't be applicable for all clients. We will use it for the best [clients] and in the stocks we research and underwrite."
The desk recently took a $30 million position for a customer. By most measures, that's a substantial sum for a trading desk.
"If you're going to commit capital you better make sure you have the right distribution in place," Misera said. "Your salesmen and sales traders have to be sophisticated."
First Union is still far from its goal of becoming a larger institutional player, however. Most of the order flow the desk sees is retail which remains important. The trading room, Misera said, is still largely a cost center that does not make money for the firm.
Facilitating the Client
Misera noted that the primary goal at First Union is not dealer profits. "We do no proprietary trading," Misera said. "Our traders trade to facilitate the client. But that does not mean they are not opportunistic."
"Every trader is opportunistic," he added. "But they run one set of books. They do not have a proprietary book." (Unlike traders at large wholesalers who are compensated on their trading profits, First Union's take a salary and a bonus which is based mostly on subjective measures.)
Holter contended that First Union does not "trade against retail." Some bulge bracket players have made profits on large flows of retail orders using the aggregation of that order flow to enhance its positions. That's the so-called informational advantage.
"We trade with retail," Holter said. "We do not make net dollars off our retail. Our interest is price improvement. We're happy to generate commission dollars for the bank."
Misera added, "We don't make a cent on retail. We do not capture any spread on it. Whatever price we get, the customer gets."
(In any event, some observers note that it can be difficult for smaller players like First Union to trade against retail flows since the informational advantage is much less defined than at larger desks.)
On the retail side, George Jennison's experience could prove helpful. Jennison serves as a liaison between retail brokerage and the equity capital markets group.
Jennison, for instance, might recommend that the desk trade a stock on a principal instead of an agency basis if he sees a steady flow of retail orders from a branch. "He understands the demands the retail system makes on us," Misera said. Jennison will also collaborate on the quality of executions.
Automatic Execution
Most of First Union's retail order flow is executed automatically. That plays well with the experience of the ex-Alex. Brown pros where volume came mostly from institutional trades. "Retail is not labor intensive," Holter said. "All of our intellectual capital is focused on the institutional business. At Alex. Brown we were known for doing things quietly. That won us a lot of large institutional trades."
Holter said the First Union desk has the ability to do that again. "We have a small and close group of people we all trust," he said. "It is easy to control access to information. We feel we can get out there and find the buyers without letting the wrong people know we've got stock for sale."
Murphy said his team is not seeking to make a profit on each block trade. The desk is more conscious of servicing the bank's institutional clients.
"You always want to make money," Murphy said, "but the institutional business isn't that easy. Margins are tight."
In the end, he said, the customer comes first. "These [institutional] customers are important accounts for the bank, so we don't have to make money on each trade," Murphy said. "We'll do what's good for the bank."
