It's battle stations for John C. Giesea, who should be a very busy man over the next four years.
"The situation today is probably as bad as we have faced in the last ten years and maybe significantly longer than that," Giesea said on his first day in his new post as president of the Security Traders Association, an organization for securities traders that goes back seven decades. Right now, he noted, many of his members are hurting.
"Profitability is our number one concern," he said. But certainly it is not his only concern. Giesea has many tasks in front of him.
Giesea, a past chairman of the STA, will also take the chief executive officer title in February. The group has some 7,000 members and 29 affiliates, the biggest of which is the 2,300 member New York affiliate. The STA is at one of the most difficult times in its history. It lost members in the Sept. 11 tragedy. It is wrestling with industry consolidation that has hurt regional affiliates.
Born to Trouble
There are numerous problems facing the leadership of this organization, an organization that was born to trouble. It traces its roots back to the most difficult time in American economic history, the Great Depression. It is a potential depression that many of his members face as Giesea begins his duties, and many look to him for answers. Giesea's potential list of issues is imposing.
"Regulation, market structure, market conditions and the economics within the country have already proven to be negative, plus layoffs that we haven't seen in many, many years," according to Giesea. A bear market is squeezing the markets, his members and their customers, many of whom were conditioned in the 1980s and 90s to believe that 20 percent annual returns were their birthright. Decimalization has narrowed trading profits, Giesea noted, which has meant that many firms are now trying to find a new operational model. For an increasing number, that means a switch to full-blown agency trading in Nasdaq issues. Many of Giesea's biggest market making members are complaining of a regulatory environment in which their electronic competitors are favored.
Giesea enters the job facing a bevy of tasks. A much awaited and ballyhooed tax relief – the reduction of the Section 31(a) transaction fee – is still stuck in Congress, despite a so far unsuccessful campaign to reform the pesky tax, a campaign the STA began in the 1990s.
"The indications are that it will pass," Giesea said, echoing the words of several STA officials who have invested years of efforts in trying to reform it.
Asked what the next leadership should do, a longtime STA activist says that, the STA must "stay focused" on Section 31(a) reform. "We need something done about this onerous tax," said Andy Brooks, vice president and head of equity trader for T. Rowe Price. Many members agree that the STA must also be more effective in its lobbying efforts.
"The STA should be more of a political than a social organization," said Stephen Bookbinder, an STA governor and the director of sales for Bloomberg Tradebook. "It needs to be directed from a political standpoint."
Bookbinder has just sent a memo to other STA leaders outlining some suggested policies at the STA. "We must do a better job on taking the lead on political issues," he stressed.
The organization also has its internal feuds between buyside and sellside members as well as between those who want dealer dominated markets to continue and those who argue that electronic call auctions are the wave of the future. These feuds are probably, to a certain extent, inevitable given the history of the STA. "These feuds could go on forever. They're part of the business," Brooks added. Granted. But the STA must keep them from becoming too big. The arguments between the different sides of the business grew out of the over-the-counter, market making community. But the STA insists it is working on broadening the depth of its membership by serving all trading professionals, a goal that may be akin to squaring the circle.
Shuttle Diplomacy
But it is also Giesea's difficult duty to act as a kind of trading industry Henry Kissinger, shuttling between the buyside and sellside, between market makers and agency trading firms in the industry, in an attempt to keep the industry united. This analogy is not a stretch. Giesea compared the rivalries between the buyside and sellside to some of the historic problems of the Middle East. He also wants to change the public perception that the STA basically exists for Nasdaq participants. He argues that the Big Board and the Nasdaq now have much more in common than in the 1980s and should work together on regulatory issues. (See question and answer section). Without a united front how can the trading industry hope to make its case – or to make any case – before the lawmakers and the regulators? Bookbinder's model for the STA would be the Bond Market Association (BMA). "The BMA does a really good job," he said. "Congress will consult with it before it acts on passing legislation that affects the fixed income markets." He added that the regulators and lawmakers should want to consult with the STA before it goes ahead with issues that could change trading rules and regulations.
Another task for the new president: finding new office space. The STA, which had its headquarters in the World Trade Center, has had to use the offices of its public relations adviser. It was working on moving into a new home in Manhattan as this article went to press.
Welcome to the leadership of the STA, Mr. Giesea.
Long-Term Goals
Giesea, a 30-year plus market making veteran of the securities industry, would not be pinned down to a list of long-term goals he expects to accomplish in his four year-term. Just putting out the immediate fires probably is enough to get him busy.
"In terms of the lofty goals, I am not going to have the precision that you would be happy with," according to Giesea, who began with Kidder Peabody back in 1967. He ended up as its head of Nasdaq trading.
Why can't he provide precision? Giesea, whose most recent post was as director of equity capital markets for Advest in Hartford, Conn., says the "short-term needs outweigh the long-term picture." Therefore, he wants to set up another long-term planning committee to look at trading industry goals over the next three or four years. This kind of committee has existed before in the STA, but Giesea says a revamped long-term planning committee must be charged with a specific task. The first chore might be the STA's long-term funding problems.
"We have found from the Section 31 issue that operating in Washington and trying to achieve passage of legislation is an expensive process," Giesea said. So he wants the committee to look at some new way to assess dues, which he believes are not generating enough revenue for the STA.
But underfunded or not, the STA has not been successful so far in convincing the Capitol Hill lawmakers to reduce a fee that is a de facto tax and generates far more money than is needed. Giesea concedes there is "frustration" that the campaign, now several years old, to rollback the Section 31(a) transaction tax has yet to be achieved.
"We appeared to be on the doorstop on that and then Sept. 11 occurred," he added. Giesea said that he has heard from the Senate Majority leader that the tax cut is still a priority item. "It is our hope," Giesea said, "that it will done during the current year." Given the vagaries of Congress as well as greater national concerns before lawmakers, Giesea and other STA officials can only hope.
Still, a veteran securities industry attorney and Congress watcher is not so hopeful. "Given the recent problems because of the war, I think it is unlikely that the Section 31(a) changes will be passed this year," said Richard Roberts, a former Securities and Exchange Commissioner in the 1990s. Roberts recommends that Giesea adopt a modest Washington agenda.
"I think it would be great if you could get the regulators merely to accept a one-year moratorium on any new major regulatory changes. Giesea should ask for a year so the industry can digest the huge changes, many of which were good, and get used to them," according to Roberts. He also says that the STA should have modest goals because, it "has only been in the last few years that it has been making a serious effort to make its case in Washington."
The trading industry, many observers say, has some catching up to do with regulators and lawmakers. Indeed, Brandon Becker, a former SEC Director of Market Regulation, says the last few years have been "very difficult" for the trading industry in Washington.
"I hope a balance will be restored in the next few years," Becker added. "What has happened is that a scandal leads to a big reaction, too much of a reaction, and regulators have often overreacted." Specifically, Becker would like to see the STA pushing for a more reasoned response to potential problems. "Every case brought by an investor doesn't have to result in an enforcement action. The most important thing is the investor should be made whole," according to Becker.
Meet the Troops
But before determining his agenda, Giesea wants to visit more desks and get a better read on the needs of the firms across the industry. Giesea says there has been a great change in the leaderships of the desks. Giesea is also looking for a better regulatory environment under a new SEC Chairman, Harvey Pitt, who was appointed by a Republican administration. Asked if he shared the sentiments of many of his members that regulators had gone too far in the 1990s, he said that traders, in the early years of his career, once had much more say about the regulatory changes.
"I worked in a time when the practitioner had a much greater voice in change than he does today," Giesea said. However, he noted that many of the dramatic changes of the past few years – such as the order handling rules and the beginnings of Nasdaq back in the 1970s – have turned out to be beneficial to the trading industry after it became reconciled to the change. Nevertheless, Giesea wants the STA to have more control over the evolution of markets. And, to do that, he believes it must build up a bigger treasury so lobbying will be more effective. Giesea, without committing to any specific method of increasing fees, wants members to provide more support.
Given the controversies swirling within and outside the STA and provided he is serious in achieving substantial goals, it is inevitable that Giesea is going to guide the STA ship through some rough seas. If markets continue to be choppy and if regulators continue to fire at parts of the trading industry, some of Giesea's members may not be working as traders in the next four years.
