The New York Stock Exchange, a crucial part of the financial system, must be able to survive a disaster. That includes damage to the exchange trading floor at 11 Wall Street. The tight security at the exchange – one of the most powerful symbols of our market-based economy – has become even tighter since September 11 last year. However, the guards, barricades, checkpoints, and surveillance equipment are not enough.

The Big Board, recognizing this, has been making plans to develop an off-site trading floor. It could also count on Nasdaq and the regional exchanges to help out at a time of crisis. However, storing a second trading floor in mothballs may not be the only answer. An adequate backup must satisfy three criteria. First, the system must be electronic and not present a physical target. Second, traders both on and off the floor must be thoroughly familiar with the system. This requires that it is used on a daily basis under normal conditions. Third, the system must not interfere with the daily operations of the NYSE's regular market.

Is there a trading facility that could satisfy all three of these criteria? Yes, there is. An excellent backup would be an electronic call auction, a facility that is being used to open and to close markets by many exchanges around the world, including the exchanges in London, Paris, and Frankfurt. The NYSE does open trading with a call auction, but its call is not fully electronic. The exchange uses no formal call procedure at the close of its trading day.

The electronic calls are floorless, and thus provide no physical target. The NYSE could run these electronic auctions on a daily basis to open and to close the markets for its listed securities, and thus participants would remain familiar with the procedure. And, with its use restricted to the open and the close, the calls would not interfere with the operations of the exchange's regular market.

Call auctions are commonly used elsewhere in the U.S. For instance, at art auctions buyers and sellers come together at pre-announced times to establish prices and to trade. Let the item auctioned be shares of XYZ stock. Assume you want to buy 100 shares of XYZ at any price up to $50 a share; that I want to sell 200 shares of XYZ at any price down to $49 and that, shortly before 9:30 a.m., we both submit our orders to the opening call. In the auction, our orders are pooled together with those of others for a multilateral execution, at a single price, at this predetermined point in time.

At the call, the pooled orders are sorted and aggregated in two arrays (one for buys and one for sells) to find the clearing price that best balances the aggregated buys and sells. Assume the clearing price turns out to be $49.40. We both trade at $49.40. At this price, your $50 buy order is price improved by 60 cents, and my $49 sell order is price improved by 40 cents. If, alternatively, the price set in the call is higher than $50, I sell my 200 shares and your buy order goes unfilled (at the higher price, you did not wish to buy). Or, if the clearing price is less than $49, you buy 100 shares and my sell order goes unfilled (at the lower price I did not wish to sell).

If a crisis were to render the NYSE's trading floor inoperative, the electronic calls could be moved almost effortlessly to center stage. As the main trading platform, they would be run with far greater frequency, perhaps once per half-hour. Trades between the frequent calls could still be made in the Nasdaq market or on the regional exchanges, but this would only supplement NYSE trading. The important thing is that trading would carry on in NYSE listed shares, and the NYSE would remain central to the process.

The NYSE's trading floor is a special resource. However, the provision of liquidity and the quality of price discovery at the exchange could both be improved by the inclusion of a fully electronic call to open and close trading. Not only would the exchange be acquiring an excellent backup facility, it would be strengthening the operations of its current market as well.

Moreover, the very ability of the Big Board to endure and to carry on without its trading floor would have a further benefit. The threat of a physical attack ever occurring in the first place would be reduced.

Robert A. Schwartz is Marvin M. Speiser Professor of Finance and University Distinguished Professor, Zicklin School of Business, Baruch College, CUNY.

As Congress picked at the remains of telecom high-flyers, another IPO scandal threatened the reputation of Salomon Smith Barney.

A former broker for Citigroup's sprawling brokerage house alleges that the firm allocated hot IPO shares to telecom executives in exchange for investment banking business.

David Chacon filed suit in Los Angeles Superior Court on July 18 this year, alleging that, after he complained about unfair IPO allocation practices at Salomon, he was fired in July 2000.

Top Executives

Chacon, a broker at a Salomon branch in Los Angeles, contends that the firm doled out so many shares to top telecom executives that some of his own clients were shutout. The suit also seeks restitution for those clients.

Some of today's most notorious CEOs are cited as alleged beneficiaries. The group includes Bernard Ebbers of WorldCom; Joseph Nacchio of Qwest Communications International; Clark McLeod of McLeodUSA; and James Crowe of Level 3 Communications. Stephen Garofalo, chairman of Metromedia Fiber Network, is also cited.

In an interview, Chacon said that Salomon's star telecom analyst, Jack Grubman, played a key role in deciding the IPO allocations.

During recent Congressional testimony about the WorldCom fiasco, Grubman was asked if top executives at WorldCom received allocations of hot IPOs. Grubman stated he could not recall.

A spokesperson for Salomon said that "the charges are without merit," adding that Chacon's suit contained factual inaccuracies.

The charges, nonetheless, have added more fuel to the worsening crisis of confidence in the capital markets.

"The IPO allocation process is broke, and it's worse than broken, it's corrupt," said Patrick Byrne, chief executive of Overstock.com, which went public on May 29.

"If you really want to fix Wall Street," he added, "I think half the problem is really the IPO allocation process. It pits the bank's interest against their clients' interest and everybody knows it and everyone is in on it."

Traditional Manner

Overstock obviously took Byrne's words to heart. Its $39 million offering was not completed in the traditional manner. Instead, it was led by W.R. Hambrect, using the I-bank's OpenIPO platform.

Credit Suisse First Boston was fined late last year for how it handled IPO allocations. New York State Attorney General Eliot Spitzer fined Merrill Lynch $100 million for its analyst reports, many of which focused on newly-public companies.

Unexploded Bomb

Perhaps the largest bomb is unexploded. As Traders Magazine went to press, a massive piece of IPO related litigation remains before U.S. District Judge Shira Scheindlin. The suit alleges broker tie-in agreements and laddering schemes from new issues that took place between 1999 and 2000.

Chacon's lawsuit, however, appears to be the first linking allocations stemming from the hot IPO market with companies that have imploded because of the current accounting scandals.

Few IPOs will be able to move through Wall Street unless these scandals are resolved. The sense of public outrage has emboldened public officials to join in the controversy. A system must be invented, some critics say, that allows the average retail investor to have a chance to purchase new offerings.

The controversial hot technology IPO run-ups were numerous. And the reputations of Several Wall Street firms were hurt in the process.

Colleen Marie O'Connor is a senior editor at The IPO Reporter, a sister publication of Traders Magazine.

Richard Pomboy has seen, and done, it all. Very well.

In bull markets and bear. Brokerage in the '60s, research boutique in the '70s, hedge funds in the '80s and '90s. Small wonder that, even retired to ski and golf in the Rockies, he can't resist keeping a very active hand in the markets, albeit these days shepherding only his own (considerable) assets. Which are largely in gold shares. And which he was way early in going into, as Dick is the first to admit.

A tech stock maven when I first met him in the '70s, Dick closed down his first, highly successful hedge fund at the end of the '80s and took a couple-year hiatus from the market, returning in '92 convinced that gold was about to end what was then a 13-year bear market. Oops. But gold did rally in '93, and Dick actually generated fancy returns for his investors for several years before running into grinding frustration as golds sank and techs went ballistic. As gold shares climbed this year, while most others sank, I often wondered what Dick was thinking and doing. Well, I finally tracked him down around the 4th of July and asked. It was worth the effort. -KMW

What do you make of market's latest slide?

We've just lived through a 20-year bull market in stocks and a 20-year bear market in gold and these things are not easily overcome. People are still hanging onto the hope stage in the stock market. I know, CNBC says you don't need to have a capitulation phase, but they are the cheerleaders of the stock market. Experience tells me that you do. You have to go from hope to fear and then to panic. And I don't think we are anywhere near that-though we're closer than we were a few weeks ago. But there are so many other forces affecting these markets-such as the dollar. One of the real risks here is competitive currency devaluations. Eventually, people are going to recognize that they aren't making any real returns in stocks-or, that if they are, those returns are going to be very low. Meanwhile, gold has traditionally done very well in periods of low real returns in the stock market. Gold has been the strongest currency in the world in the last two years.

If it's a currency.

That's true. But a currency is what it traditionally has been, except in the last few decades. Historically, for 5,000 years, it was a currency. We have seen some protectionism lately, but the true issues here are no real returns on assets, and the risk of competitive currency devaluations. Meanwhile, pressure on manufacturers here, I think, is going to dictate that we not get too worried about a declining dollar. Meanwhile, as foreign economies start to recover somewhat-those economies have fewer excesses than the U.S. – they are going to withdraw money on the margin, or at least send less money over here. But we need something like $1 billion a day to fund our deficits.

Only something like 75 percent of all the world's money flows everyday.

Yes. We can't keep absorbing that amount of capital. Eventually, we'll get some inflation. The dollar decline is obviously going to have some inflationary impact and we also have additional federal spending to combat terrorism, etc. But I think the big issue on the inflation front-and we will just have to see how it shakes out-is Japan. To solve its problems, Japan is eventually going to have reflate. There is a theory that the reflation could be so severe that it would really trash the yen to a degree that is unacceptable to the rest of the world. If so, the solution would be for the rest of the central banks to buy the paper issued by the Japanese government. But in so doing, Japan would export its reflation to the rest of the world. I don't think any of this bodes too well for the stock market, which still is levitating on some fancy multiples. And that's before we even consider the loss of confidence in corporate reporting and the U.S. market. All of this, in short, bodes well for a move back into tangibles, which eventually takes place at the end of all paper bull markets.

Before we mine your favorite topic, let's chat more about stocks. One of the great benefits of talking to someone who has been active in Wall Street since the 'Sixties is that you've seen a full cycle or two-

Inevitably, I guess, over 35 or 40 years.

Many investors think a bear market is a couple of weeks of unpleasantness like they experienced in '98, when Russia and LTCM defaulted.

As you know, I lived through the bear markets of '69, '72, '73-very unpleasant times-and was even heavily involved in buying tech stocks, way back when, so I have some sense of what they should sell at. But in the dot.com mania, I was completely lost. I really could not understand it at all. As a matter of fact, two years ago I was skiing with a friend who was bragging about his stake in Intel, which at the time was trading at upwards of $70. I told him that I thought Intel was one of the finest companies in the U.S. and that I was going to be very happy to buy it in single digits-at which point he almost crashed into a tree!

No doubt. Hope he sold, too.

I don't know. But there is a time to buy these things and a time to sell. Bear markets can be very painful, yet because we had a bull market basically for 20 years, most investors have no idea how bad a bear market can be. Unless, of course, you have been involved in gold for the last 20 years-or in Japan for the last 10-plus. In which case, you are fully acquainted with bear markets.

Let's dip into ancient history. Back before you started your first hedge fund, in 1980, you ran a research boutique-

I actually ran a brokerage firm. We were members of the Exchange and specialized in researching high techs. That was in the heyday of research boutiques-which look like they could make a comeback.

That's clearly my hope.

I think that is really the trend and that is going to be terrific. It eventually will give investors some more confidence in Wall Street.

It's just too bad there's no overnight cure. You alluded to Japan. Many investors reject those comparisons because Japanese society is so very different from ours. "They can't get out of their own way." But American investors were just as hapless in the 'Seventies bear market.

Yes. That was our world back then. Some of the Fidelity high-tech funds fell something like 80 percent in the early 1970s. Which implies we have some more room to go on the downside if this is going to be similar to that. It is a very painful experience. We really have to get to the point where people don't ever want to hear about the stock market again-and we are nowhere near that.

Even if outrage at corporate shenanigans is finally being vented.

We have had a decade or two of real greed, during which the reward system that corporate executives operated under was pretty clear: You got a lot of stock options and you did whatever you could to get your stock up. You exercised your stock options; sold simultaneously and you retired. You didn't worry about what was underlying the numbers or about the future of the company. One thing that could be done to correct the situation would be- since exercising a stock option produces ordinary income and the recipient has to pay taxes-let them sell just enough of their position to pay the taxes but then require corporate officials to hold the remainder of their positions for, say, three years. Then they'd be in the same boat as any pension fund or other long-term investor-and they probably would run the business very differently.

Assuming they were also prohibited from using loans or derivatives or any of the other clever methods that have been devised for corporate insiders to effectively (not to mention quietly) monetize those shares earlier.

Absolutely. But I have not seen that proposed yet and I assume the lobbying against any such proposal would be pretty significant. As you know Wall Street benefits from volume-and public offerings and higher prices make all of that possible. So the Street is going to lobby against any real reforms despite what they may say. The only thing that could even dent the Street's thought process on that might be the judicial losses that they are going to face-which could become very significant.

As I wrote just after the market peaked [w@w, April 20, 2000], I only wish there were a way to invest in the class-action law firms-without actually becoming a lawyer, that is.

Very clever. But I guess there really is no way to do that.

No, but unfortunately the lawyers are the only ones who will walk away from this winners.

That is right. Eventually we are going to have a wonderful opportunity in the stock market, but that is well down the road. In the meantime, you will have erosion in the equities markets, erosion in the dollar and eventually a give-up. Only then will we will have some kind of basis on which real investors can get involved again.

Which is why you've liked gold, for a long time?

Gold's story is actually getting more and more compelling.

A lot of serious people argue that gold is really not an investment alternative at all-

Well, gold has been discredited in the last 20 years because no one needed gold. Everything else worked. But in this environment, there are very few things to invest in. And gold has historically had a very high inverse correlation with the Dow and a very strong inverse correlation with the dollar.

The metal's price, relative to the Dow, has fallen off the charts.

That is true. Relative to the Dow, gold's price is about as extreme as it's been in history. And there are other things working in gold's favor. The central banks a couple of years ago signed what was called the Washington Agreement-it was signed by the British and European central banks and the U.S. went along with it-under which they limited their annual sales to 400 tons. Considering that there is probably a supply-demand deficit in the market of 1,000 tons annually, that is really not a huge amount of central bank selling. So that took a little pressure off of the market. Talking about central banks, the central banks that have been sellers of gold were typically taking those proceeds and investing it in U.S. dollars. But since the U.S. dollar has started depreciating, the question is are they going to pursue that avenue as vigorously as they did before. The answer is probably not. If they sell their gold, what are they going to buy? The Bank of England has been selling gold for the last couple of years and so far they have left something like $500 million on the table. The Bank of England has notoriously, throughout history, marked the bottom with their gold sales. They did it with the London gold pool in the early 1970s. On the central bank side, you also have the Asians under-owning gold. The question is what are they going to do with their reserves? Are the Chinese going to continue to buy dollars? Are the Japanese going to continue to buy dollars or will they start to build up their gold reserves, which are very small? Those are interesting supporting aspects of the case of gold. But its basis is the regular supply/demand situation. Mine supply is decreasing. There has been very little exploration in the last five years and it takes a long time, after finding a deposit, to actually bring it into production.

Aren't those supply/demand numbers very controversial?

Well, there is no way that producers can replace the amount of gold they are producing-2,500 tons a year. They are finding only a small fraction of that. As a matter of fact, you have seen a lot of acquisitions to mask the fact that their longer term production profiles are declining. The upshot is that there is no doubt that mine supply is decreasing. As a matter of fact, the whole bear market in gold-this is an interesting point-would have been shortened substantially had real economics come into play. But because of the derivative markets, gold mining companies were able to sell forward production at higher prices as the market was declining. If they would have had to sell at spot, they would have closed down the mines a long time ago. But because they could sell at higher prices in the futures market, they did that very aggressively-which enabled them to keep some production open. The Bank for International Settlements just released some statistics on the worldwide derivatives position in gold, putting it at $230 billion in total. JP Morgan Chase alone has a gold derivatives position of $45 billion. Now, consider that total annual mine production is about $25 billion. I am sure that the BIS or Morgan would tell you that somehow it is all market neutral -which of course is what we heard from LTCM. My guess is that there is a significant short position out in the market-in addition to the producer forward sales-and that it is somehow hedged in a manner that these institutions believe neutralizes the position. But these markets don't always work the way some mathematician projects them to work. What we do know is that the derivatives market in gold is enormous compared with the size of the market.

I'll say, representing almost 10 years' worth of production.

Exactly. And as I say, the volatility in gold can be such, or the counterparty risks can be such, that those hedges won't work.

There also is another influence working on gold's supply/demand situation that I think is still pretty much unknown. There is an effort afoot to introduce later this year a gold trust certificate that will trade on the NYSE like a stock.

Like the exchange-traded sector funds?

As I understand it, what would happen is that every time someone bought one of these trust certificates, someone-a financial institution or bank-would actually buy an underlying amount of physical gold. So you would have a trust certificate which actually represented ownership of physical gold. It is a very interesting concept being sponsored by the World Gold Council. I expect a full registration statement to be filed with the SEC over the next couple of months. One of the issues that currently deters individuals from buying gold is that the process is rather complex. You have to open up a commodities account, which involves more logistics than people typically want to get involved in. Likewise, many equity funds are not registered as commodities-pool operators and therefore are not allowed to buy gold. But these trust certificates would represent something that everyone could buy very easily. If other alternative investments are not doing well, I would imagine that just about every broker in the country would decide, "Why not buy some?" There is also the possibility that, if and when those trust certificates come into being, they will take a lot of physical gold out of the market. Remember, the physical gold market is already in a deficit position because mine supply is probably 1,000 tons per year less than demand for jewelry and industrial use. Up until recently that gap has been filled by central bank sales of let's say 400 or 500 tons a year and by all of the forward sales by the producers and from some other forms of shorts. But now, as the producers are no longer selling forward -and are actually buying back (virtually every producer except Barrick (ABX) and Placer Dome (PDG) among the North Americans, has been buying its hedges back) those forward sales are actually being reversed. Plus you've got a cap on central bank sales-from European central banks, at least-so there probably isn't too much appetite for shorting something that is starting to go up. In other words, all of the supply/demand dynamics have changed rather dramatically over the last six months. Which is why gold has been going up.

At least until running into some recent headwinds. But I can't imagine that someone isn't trying to dream up a way to back those proposed gold certificates with derivatives instead of the real thing-

Actually, the whole concept is that these certificates would represent physical gold and get it away from the derivative market. The derivative market is really not what you want to be backstopping this now because that is not real safety. Who knows what is going to happen in the derivatives market? My impression is that this is a very interesting overture by the World Gold Council, which has typically not been very aggressive. But here they have come up with a very good program; gone about this very professionally. I have seen their presentation and it looks like a first-class program that should work. Anyway, all these dynamics, plus the underlying factors of poor alternative investments and depreciating currencies all present a pretty compelling backdrop for gold-something we haven't had all coming together for 20 years.

What golds do you like?

Well, if you eliminate the big hedgers, Barrick and Place, as attractive candidates to buy, with all the consolidations and the shrinkage in capitalizations of these companies (because their stock prices have been in the doghouse just until recently), you really are looking at probably $70 billion of market cap in the whole gold industry, combined. This is not like 1993, when gold had a big run-up even though gold stocks were competing with a lot of other good alternative investments. You could have bought Intel or whatever else you wanted back then-and the market capitalization of the gold stocks still got to be a higher number. There were many more gold companies then, too. The South African industry has consolidated basically down to three companies from over 20. So now you have a much smaller universe. That tells me that in this run-up, the gold stocks should certainly do as well and will probably do better, relative to gold bullion, than they did in 1993.

Which wasn't badly, as I dimly recall.

In 1993 gold got to $400, more or less, and the XAU, the Philadelphia Gold Index, got to somewhere around 150. And that is pretty much the way, traditionally, the pricing has worked. For every one percent move in gold, you typically had a three percent move in the gold shares. So if gold went up to $400 dollars here-let's call it a 30 percent move in bullion-you would get a 100 percent move in the gold stocks. And that would move the XAU index from 73 to say 150. That is just about right. Except that in this environment, you might do a little better since there is more of a scarcity of gold shares and there are fewer attractive alternatives than there were in '93.

Of course, the market has a way of supplying enough shares to meet rising demand-

That is right. But if you assume that every single company that makes up that $70 billion of gold market value issues 10 percent more equity, which is not a bad guess, you are simply moving the gold market's capitalization to $77 billion-which is still just a fraction of the value of many of the leading Dow components.

Which brings up something I hear repeatedly. There simply isn't enough liquidity in the gold shares to attract serious institutional interest. After all, there are 65 companies now in what Steve Leuthold has dubbed "the billion shares outstanding club," but not a gold among them-

In fact one of things motivating its acquisitions, Newmont Mining Co. (NEM) claims, was its desire to reach a capitalization that would be attractive to institutions. Newmont has a capitalization now of $11 billion and it is a strong advocate of being unhedged. So Newmont actually, among the majors, is going to be the hands-down favorite for institutions-and everyone-to go into. And Newmont is actually a very compelling story, when you look at the numbers, Newmont's cash flow at $325 gold is about $2.60 and the stock is selling today at $26. So it is trading at 10 times cash flow. But one of the important aspects of valuing a gold stock is the option value for the potential increase in the price of gold. At the bottoms of cycles, there is basically no option value and as gold prices rise, the option value obviously increases. And the option value relates to (1) the price of gold going up and also to (2) currently uneconomic projects that these companies have that become economic at higher gold prices. That gives you a lot of leverage. Especially because as gold price goes up, production in many of these companies can increase without commensurate increases in costs. For every $25 increase in the gold price, Newmont's cash flow increases by $200 million. That is pretty substantial leverage. And the multiples tend to expand. So at $350 gold, a good number for cash flow at Newmont would be $3 a share. At that point I would think that your multiple would start to expand to maybe 15. The highest multiple on Newmont that I have seen historically is 25. But let's say it goes to 15. That means that on a 10 percent move in the price of gold, you probably have a 50 percent rise in the stock price. So considering the market cap that they have, producing eight million ounces a year and having 90 million ounces of reserves, I think that Newmont is a very interesting stock. While they have a reasonably high amount of debt, that debt is coming down fast due to their cash flow. At current gold prices, in three years, they will have no debt. The only negative in Newmont is that they acquired Normandy-and Normandy had a hedge position. But it is primarily in Australian dollars and every time the Australian dollar moves up one cent, that reduces the negative position in the hedge book by $50 million. I would guess that their negative hedge book right now is probably about $300 million so if you had a six-cent move here in the Australian dollar, which is very possible, that hedge book would be neutralized and make it easy for Newmont to close it out. So it is also a currency bet. Looking at gold as having a very good inverse correlation to the U.S. dollar, in theory, should work. Plus, Newmont has closed out two or three million ounces of their hedge already this year. They are taking every opportunity they can to either deliver into the hedge or close it down, and the hedge is equal to less than one year of Newmont's production. So I think it will not be an issue.

They obviously figured that Normandy was worth the trouble.

Normandy had a lot of good assets. Newmont also at the same time acquired Franco Nevada, which is a very interesting Canadian company, along with some of the Franco management, which was widely considered the best in the gold industry, and is now in senior management at Newmont. So they got good assets, they dramatically improved their balance sheet and they got good management. It was an all-around win, which makes Newmont the most attractive of the majors. But the real explosion in gold shares earlier this year was in some of the leading unhedged South Africans. They will continue to be the leveraged bets because of the fact that they have enormous reserves that are very easy to bring on as the gold price rises.

Such as?

For some of these companies, the numbers are very attractive. Harmony Gold Mining Ltd. (HGMCY) is the leading unhedged company-well, it and Gold Fields (GFI) are unhedged but Harmony has been an outspoken "un-hedger" for many years. They have 170 million shares outstanding and they are selling at around $16, which gives them a reasonable market cap. They trade a couple of million shares a day in the U.S. They do about 3.4 million ounces of production. Currently they have a cash flow of $1.40 a share, so they are also selling at a little over 10 times cash flow. But at $350 gold, they have a cash flow of about $2.50 and at $400 gold, they have a cash flow of somewhere between $4.50 and $5. So just to look at the higher number, at $400 gold, which would be a 30 percent rise in the price of gold, you could have Harmony selling somewhere between $50 and $60, meaning you would make 300 percent to 400 percent, if everything held true, on Harmony versus 30 percent in gold bullion. And it has virtually no debt. They have 40 million ounces of reserves. Their resources are enormous. Could be as high as 200 million ounces-including its 40 million ounces of reserves. And as the gold price rises, as I said, they would find it easy to increase their production. So I think you will see a steady increase in production.

What about Gold Fields?

That is also true of Gold Fields, the other outspoken "un-hedger" and a larger company. They have 470 million shares outstanding, trading around $13. They have about $1 a share of cash flow at the current gold price. At $350 gold, they'd have probably about $1.50 of cash flow. They have an excellent balance sheet. They have 85 million ounces of reserves and 150 million ounces of resources. Both stocks have done extremely well. Harmony went from $4-$4.50 in October to about $18 recently. It backed off to around $14 before rebounding some. The action in Goldfields has been somewhat similar because the cash flow generation of these companies is just enormous as the gold price goes up. So while the XAU has risen roughly from 50 to 75-a 50 percent increase, you could have, if you had been in the right stocks, done substantially better than that. And these two South Africans-Gold Fields and Harmony-are your two leading unhedged most-leveraged producers.

Are there other gold mining stocks you can't resist?

Among the larger ones, I also think Freeport-McMoRan Copper & Gold (FCX), another unhedged producer, is very interesting. Unfortunately, its reserves are in Indonesia. They produce 2.5 million ounces of gold a year. It sells at a very low multiple of cash flow. Its cash flow is now about $3.50 and the stock trades around $18. What the company always says is that if someone were to buy them and pay the same multiple that Barrick paid for Homestake, the price for Freeport would be $40 a share. Now, Freeport probably will get acquired at some point, but it probably won't be at $40. But it will be at a substantial premium from where Freeport is trading.

Thanks, Dick.

Kathryn M. Welling is the editor and publi-sher of welling@weeden, an independent research service of Weeden & Co. L.P., Greenwich, Conn. http://welling.weedenco.com

Gregory McDermott, an equity options trader with about a decade in the trading business, was hooked in high school. That's when it all began and yet he was not even vaguely involved in trading at that time.

McDermott, who grew up in the Philadelphia area, took photos and helped to put his high school yearbook together back in the 1980s. He discovered that he enjoyed the process of laying out a publication and of finding the right photos. McDermott loved the challenge of finding that unique perspective – whether it was a stunning aerial photograph of the World Trade Center or Center City in Philadelphia. He loved the challenge that everyone else had passed by.

"It was so much fun. I actually became the editor of the yearbook. I knew that I had found something that I wanted to stay with," he said. From that point, he could never walk away from the camera.

That's even though he later decided that he was headed for a business career that would land him in the middle of the trading industry.

Small Publications

Still, he took freelance assignments for various small publications. That's even though he continued to pursue his career as a trader. His hobby would eventually lead him to cross paths with one of the rich and the famous.

McDermott, a 1987 graduate of St. Joseph's University, also has pursued a trading career. He has worked for First Continental Trading in New York and most recently as head options trader at JAS Securities in Philadelphia, managing the group's options portfolio risk.

Although McDermott says he is a trader first, photography remains something he loves.

"But I find many similarities between trading and photography," said McDermott, who is married with two children. "Trading and photography both require that one applies oneself. They both require intense periods of concentration for short periods of time. One is always looking for something that others have missed," according to McDermott, who lives in Holland, Pennsylvania, a suburb of Philadelphia.

McDermott's search for the unique has paid off. Today, some of his photos hang in the Philadelphia Stock Exchange. The theme of most of McDermott's work is the special character of his favorite city.

"I have some special shots of the city of Philadelphia. It is a city that I have always loved, having grown up here," he said. "Many people don't see what a beautiful town Philadelphia is. We have some special buildings and there are lovely landscapes that can be captured and that should be preserved."

Good Memories

McDermott also takes many photographs of his two young children, again looking to freeze a point in time so it can always be remembered. McDermott's love of photography has given him several good memories.

After college, McDermott's search for these unique photos took him just out of town. In fact, it took him out of state, across the Delaware River to New Jersey.

McDermott worked part-time as a photographer for the Trenton Thunder, a minor league affiliate team of the Boston Red Sox. "I was assistant photographer for the team and it was an experience that was great. I would still do work for them today anytime," he said. One of the benefits of that work was the chance to see an up and coming player.

McDermott would take photos of shortstop Nomar Garciaparra a few years before he made it to the majors and became a superstar baseball player.

"Even then, everyone could see that this guy was special. Compared to other players, he had so much more confidence and skill than anyone else on the team. Everyone down there just knew that he was headed for the majors and that he was going to be a great, great player," McDermott said. He added that one of his prize photos is an autographed picture of the Boston Red Sox superstar, a ballplayer who will likely someday have his photograph in the Hall of Fame in Cooperstown, New York.

"Nomar was a great guy and it was always a pleasure to be with him," according to McDermott.

A New Career

Does McDermott ever foresee a career in photography? No. "I consider myself a trader first, although photography is something I will always have," he said. But McDermott says trading, especially equity options trading, is also another love.

"Like photography, there is a tremendous satisfaction in finding that trade that no one else can; in getting that trade that is exactly right," he said. McDermott knows that achieving this is as difficult as obtaining a perfect photo. Nevertheless, he enjoys the chase. Whether it is the pursuit of the trade or the photograph, the quest is something that always intrigues McDermott.

Gregory McDermott is hooked.

A New Turn for Hedgies and Money Managers

An early bird in the direct access game is beefing up its system to appeal to institutional traders.

Technology vendor Townsend Analytics is augmenting its pioneering market data and direct access system – RealTick – with new features for hedge funds and other money managers. The changes come amidst a prolonged slump in its core retail market.

The move to the buyside was highlighted recently by Townsend's deal with Instinet. The big ECN gave Townsend the right to broadcast and grant access to every single quote on its book. Previously, the vendor could only offer Instinet's best prices.

Now, with Instinet on board, RealTick users can trade against the full books of five of the top six ECNs. That's a big chunk of liquidity.

The Instinet deal was just one of several buyside-friendly additions to the RealTick platform over the past year or so. Last year basket trading was added to satisfy the hedge funds. This year saw the debut of market data from the New York Stock Exchange's OpenBook and Institutional Xpress initiatives. The pricing data gives block traders a better picture of liquidity on the Big Board.

Also, this year, Townsend opened up the RealTick order management system to outside systems. Quantitative traders using black boxes to make their trading decisions can now program those devices to automatically send order instructions to RealTick. That eliminates the manual data entry.

More services are on the way including direct access to foreign markets and new order types built especially for Arca-Ex, the new stock exchange owned by sister company Archipelago.

Townsend sales exec Jeff Brown says the future of direct access at the institutional level is bright. That's because the technology can do everything a full-service trading desk can do, he adds. "Most of the value proposition provided by manual order handling by brokers is incorporated into electronic direct access platforms," he claimed. "By that I mean order types like hiding, reserve, and staged orders."

SOES Bandits

RealTick won its stripes in the equity market of the mid-90s when it became the weapon of choice among the so-called "SOES bandits." The rapid-fire retail traders made huge profits leveraging RealTick's connection to Nasdaq's SOES to pick off the quotes of slow-to-update market makers. The group morphed into daytraders, sticking with RealTick to play the bull market via ECNs.

But retail is now in the dumps. So both Townsend and sister company, Terra Nova Trading, a brokerage which supplies customers with RealTick, are moving up the food chain. Last year, Terra Nova launched an institutional division that is now staffed with 15 employees operating in Chicago and Denver.

Servicing the pros is not new at Townsend though. Its service bureau has always found favor with some large program and proprietary desks. The vendor counts Goldman Sachs as a client, for instance. The big boys use RealTick mostly for market data, though, and not executions.

Brown says Townsend's data goes beyond that offered by the standard vendors such as Reuters (where he used to work). The system pumps out upwards of 2,000 data sets for every name, according to Brown. Only a couple of hundred originate at the exchanges. The rest are all "value-added" calculations such as the average spread of a stock during the past minute and the number of changes to the bid and ask in the minute.

Below are some features. Owing to the close relationship between Townsend and Archipelago much of RealTick's functionality actually resides on ARCA. Although RealTick users don't have to route their orders to Archipelago, it holds some key functionality.

Hiding

As with many direct access platforms RealTick order types include discretion and reserve. The system will display at one price, but can be given the discretion' to trade at a more aggressive price. The discretionary price is not revealed to other market participants. It's used when "you don't want people jumping in front of you," said Gary Dennison, a sales rep with Terra Nova Institutional.

RealTick also lets traders disguise the full amount of their trading interest. A trader can display 1,000 shares, for example, while lodging another 25,000, for example, in reserve. Once the initial 1,000 shares are taken out, the system replenishes the displayed amount with another 1,000 shares.

Market Maker Bypass

RealTick's NOW order is a market order that scans ECNs but ignores dealer quotes. The order first enters the Archipelago ECN and seeks a match. If no match exists, then ARCA checks the prices of other ECNs, but not those of market makers. Dealers are bypassed, according to Dennison, because orders are sometimes delayed at their desks. Nasdaq rules permit market makers 30 seconds to respond, says Dennison.

Sweeps

RealTick lets traders sweep multiple quote levels on five ECNs. With the recent addition of Instinet, RealTick now offers full depth of book access to all major ECNs. The others are Archipelago, REDIBook, Island and Bloomberg TradeBook. For listed stocks, RealTick will sweep the best quotes in the market. The sweep technology resides with ARCA. RealTick just provides the route to ARCA. A separate window within the RealTick GUI aggregates and tiers the quotes much like Nasdaq's SuperMontage is slated to do. In fact, RealTick's window is called "MarketMontage."

Tagging Along

Traders seeking to limit their losses with stop orders have a unique choice with RealTick: the trailing stop. Traditional stop orders are placed below the price a trader paid for a stock or above the price at which he shorted it. Once the stop level is breached the position is liquidated, limiting the trader's losses. RealTick's trailing stop works similarly except that the stop price changes with the market price.

Assume, for example, the trader bought in at $14.50 and set a trailing stop of $1.00. If the stock drops to $13.50, the position is liquidated. If the stock rises to $14.60, the stop price increases to $13.60. If the market price rises to $14.70, the stop price increases to $13.70. If, after rising however, the stock turns back, the trailing stop will remain at $13.70. This order type only works on ARCA.

Trading Assistant

Like any good trading assistant RealTick will monitor a particular stock and execute an order if the trader is too busy to do so himself. By using a "conditional" order the trader can focus on more pressing matters.

A conditional order is one that is sent into the market once some price or time condition is met. For example, RealTick can be programmed to trade a particular stock if it becomes equal to, less than or greater than a certain price. (Of course, the trader can accomplish the same result with limit and stop orders.)

A more advanced schema is to instruct RealTick to monitor one stock and trade another. If the trader expects movement in DELL to trigger movement in another tech sector name, for example, he could direct RealTick to watch DELL, but trade the other stock.

More typically, a conditional order is used to seek execution during a specific time period. Because much trading occurs around the opening and closing of the market, traders like to execute during these highly liquid periods. A trader could instruct RealTick to start looking for a fill at 3:50 p.m., for example, and stop looking at 4:00 p.m.

Pegging

A trader can stay at the top of the montage without manually updating his order. RealTick lets him peg his order to either the Best Bid, the Best Offer or the midpoint between the two. As the market moves, so does the trader. A buyer who pegs to the Best Bid when it is $14.47 will display at $14.47 as well. If the Best Bid moves to $14.48, the trader's bid also moves to $14.48. Pegging the midpoint allows for a more aggressive posture. When there is a change in either the Best Bid or Best Offer or both, the trader's quote becomes the best price. With some stocks, though, pegging the midpoint is likely to be difficult. Decimalization has slashed spreads on many highly liquid stocks to only a cent. "Some of these orders had more relevance before decimalization," noted Brown. Some ECNs such as Island do offer sub-penny pricing though.

Sit Tight

Orders routed to Archipelago either fill there or pass through to another market center. However, if a trader is worried that a match will pop up on ARCA while his order is zipping around the marketplace, he can instruct ARCA to hold onto the order. If the trader is looking to buy stock at $10.00, for example, but the best offer on ARCA is $10.01, the order will journey elsewhere. If, during that time, a $10.00 sell order hits ARCA, the trader risks losing the stock to a competing buyer. To protect himself he can elect to remain on ARCA. "We're talking about less than a second," noted Townsend's Josh Moses.

Hot Blocks

For those traders who want to be in the know when a large block hits the tape, Townsend offers a new data service called "Hot Blocks." But rather than simply notify the trader every time 10,000 shares-the standard definition of a block-hits the tape, RealTick sets a minimum trade value of $100 million. "That's because 10,000 shares of a $100 stock is a lot more significant than 10,000 shares of a 50-cent stock," said Brown.

The Townsend Analytics, Terra Nova Trading and Archipelago complex is a formidable operation with about 700 employees. While each of the three is a separate firm they all operate under a common holding company where interdependence is the modus operandi.

Townsend's RealTick is the default front-end for Archipelago users without direct FIX connections to the ECN. Much of RealTick's functionality is actually housed in Archipelago. Terra Nova is Townsend's biggest client. The brokerage offers its customers RealTick.

The Cockpit

In the executive suites, the chief executive of Terra Nova Trading, Chris Doubek, came from Townsend. The chief executive of Archipelago, Jerry Putnam, was the founder of Terra Nova. The CEO of Townsend Analytics remains founder Stuart Townsend. All of the three firms are based in Chicago.

Townsend is a vendor whose customers fall into three sellside categories: daytrading brokerages, proprietary shops and traditional regional brokers. Terra Nova, a broker dealer, concentrates on active traders and small buyside shops. Archipelago services the pros on both the sellside and the buyside.

Sonic Trading Is Ready for a Dog Eat Dog World

Another direct access firm is courting the pros. Sonic Trading Management

is launching a new division called Sonic Financial Technologies. It will house its growing business servicing institutional traders on both the sellside and the buyside. The vendor's selling point is speedy Nasdaq and listed stock executions via its trademarked SonicStorm direct access system.

"Milliseconds matter," said Joe Cammarata, a Sonic co-founder. "When there are only a limited number of shares being offered whoever gets there first is going to get the stock. It's dog eat dog."

Cammarata claims a speedy SonicStorm ensures at least 35 percent of users' orders are price improved, or filled better than the national best bid or offer.

Depth of Book

The Sonic service includes full depth of book of five ECNs; basket trading; smart order routing; real-time compliance and risk management; institutional order types; and direct access to all 11 ECNs, SOES, SelectNet, and the exchanges.

The 40-person Sonic is a relative newcomer to the front-end game, starting out life in late 1998 as a broker dealer for daytraders. That segment of the market collapsed along with the bull market in early 2000, but by then Sonic was gaining a following among hedge funds.

In late 2000, it made the decision to set up a service bureau and license its technology to broker dealers and hedge funds. The broker dealers were generally small daytrader shops looking to save money on infrastructure. The hedge funds were delivery-versus-payment customers introduced by their clearing firms.

Rather than a flat, one-time license fee, however, Sonic stuck to its commission-based origins. Rates were $2 per 1,000 shares. Customers paid every time they placed a trade.

The catalyst that shot Sonic into the institutional space was the successful debut of Lava Trading. Last year, Lava became the darling of the dealers when it brought ECN depth-of-book aggregation and direct access to the upper echelons of Wall Street for the first time.

While Cammarata applauds Lava's success, he maintains Sonic has always offered full depth of book. "Sonic has been aggregating ECN quotes and full books into their system since early 1999," he said. Sonic now broadcasts and offers access to every quote on five ECNs: Instinet, Island, Archipelago, REDIBook and Brut.

Customer Base

Sonic's customer base has evolved. Twelve months ago, according to Cammarata, the mix was 95 percent active trader and five percent institutional. Today, it is 65 percent institutional and 35 percent active trader.

"Active," as defined by Cammarata, however, means hedge fund and not retail. "Institutional" means traditional buyside and sellside. Cammarata, an alumnus of Datek Online, says Sonic has never serviced the run-of-the-mill daytrader. Individuals have generally been sophisticated ex-Wall Streeters.

Below are some order types and other features.

Hiding and Chiseling

Traders who want to hide their entire order from the rest of the market can do so in SonicStorm when executing on the Island ECN. The functionality is Island's. SonicStorm supports it. A buyer, for example, may instruct SonicStorm that he is willing to pay slightly more than the national best bid. SonicStorm knows it. Island knows it. But no one else does. Hiding helps the buyer avoid a bidding war for the stock. As soon as an appropriately priced offer posts on Island, a trade occurs.

Assume the best bid is $10.96 and the best offer is $10.98. A typical hidden buy order will be priced a fraction of a cent higher than the best bid. That's possible because Island supports sub-penny pricing. If the hidden buyer is bidding $10.961, for example, he will trade if an offer of $10.96 or less posts on Island. The hidden buyer wins the stock for a slight premium. The seller gets price improvement. The displayed best bidder gets nothing. "The guy is chiseling for a tenth of a penny," explained Cammarata.

Labor Saver

Canceling and replacing an order can be time-consuming and tedious for a trader who wants to stay at the top of an ECN's book. Whenever prices change he must manually cancel his quote and then post another. SonicStorm does that work for him through its pegging mechanism. A trader can peg his order to the best bid or offer. As the quote moves so does the trader's order price. A trader can also peg his order above or below the quote. As an example, assume the best bid is 97 cents. The trader instructs SonicStorm to peg better by one cent but not to go over $1.02. He posts at 98 cents. If someone else then bids 98 cents, the trader's order will float up to 99 cents. It will go no higher than $1.02 though. "It automatically keeps you moving, represented as the best bid or offer," Cammarata said.

Discretion is the Better Part

Like most direct access systems geared towards block traders, SonicStorm supports discretionary orders. Traders can instruct SonicStorm to display at one price but give the system the discretion to execute at a more aggressive, undisclosed price. The mechanics are as follows: A trader looking to buy 15,000 shares of CRDM, for example, can instruct SonicStorm to display 300 shares at 97 cents on an ECN of his choice. Let's say that's Brut. He stashes the remaining 14,700 shares in reserve on SonicStorm. He also informs SonicStorm that he is willing to pay up to 99 cents for the lot.

If a sell order of appropriate quantity priced at 99 cents or less posts on any market center, SonicStorm's smart order routing mechanism will grab it. The sell order does not have to post on Brut. A trader must display a portion of his order somewhere, but is not restricted to trading on that venue. "It's kind of like electronically working the order," Cammarata said.

Discretion + Pegging

The two order types can be combined. Both the displayed price and the discretionary price float with the best bid or offer. The trader who wants to buy 15,000 shares of CRDM can display 300 shares on Brut at one cent better than the best bid. Assuming a best bid of 97 cents, he shows at 98 cents. His discretionary price is pegged at two cents better, or 99 cents. Finally, he builds in a top of $1.02.

At first blush, an upwardly moving discretionary price appears a contradiction in terms. The trader is not sure how much he should pay. Cammarata explains his customers want the ability to change their minds in a rapidly moving market. And besides there is the pegging order's $1.02 top to keep him within his limits. "They love it," he said. "It's a more aggressive way of entering discretionary orders."

Sonic Super

For those traders who want to see their orders represented on multiple ECNs at the push of a button, SonicStorm offers the Super order. The system lets the trader instantly post limit orders on as many as 11 ECNs and various regional exchanges. Rather than rely on the smart router to pick up shares at the prevailing best prices, the trader can establish his own pricing agenda.

Keeping an Eye on the Dealers

Traders who like to keep tabs on the activities of Nasdaq market makers can get some inkling of what they're up to through SonicStorm. A pop-up window shows the number of shares bought and sold by every dealer accessing certain ECNs' quotes via SelectNet. The data is provided by the ECN, not by Nasdaq. It does not show how much and at what price a dealer has posted on the ECN. That is confidential, of course. One morning last month the system showed Morgan Stanley to be the biggest buyer of MSFT on Island. The big broker had bought 8,035 shares and sold none.

How the Little Guy Is Striking Back

Competition in the order management business could become more intense because of improvements in a Nasdaq product.

The reegineered product, known as ACES, or the Advanced Computerized Execution System, is available free to order delivery firms. And it gives users more control over orders routed to them.

ACES, say Nasdaq executives, has come a long way since it was introduced in 1988. ACES links all Nasdaq participants. Indeed, Nasdaq has turned the product into an order delivery system for dealers, a system which is especially useful for small firms.

Today, small volumes from individual firms are not large enough to support the cost of installing BRASS, the SunGard Trading Systems' product, say some trading pros. A majority of Nasdaq orders are now routed over BRASS.

Execution Function

ACES has changed over the years. An automatic execution function was dropped in 1998 following the introduction of the order handling rules. Those rules encouraged Nasdaq participants to manage an open order file internally rather than on ACES.

"We removed the Auto-ex functionality within ACES making it the order delivery system that it is today," said Ron Lipof, an ACES product manager for Nasdaq in New York. (The anomalous "E" for execution, however, is still used, because the name ACES was trademarked. It is also used because the name is familiar to the some 140 firms that use the system.)

At the same time Nasdaq allowed routing in any stock, while providing market makers with greater control. This expanded function permits users to be selective about which customers can send them orders. Thus, there is improved electronic control of relationships.

There are several reasons why ACES could prove a hit, according to Nasdaq officials. The improvements have kept pace with evolving technology. ACES is said to be reliable. And, for its order entry users, it is free. "If you enter an order into an ECN, there is usually an access fee, but order entries into ACES are free," Lipof explained. "It is the market maker side that pays."

"This is because market makers thrive on order flow, but they will be selective about who they will pay for," he added. "We don't usually have day traders putting their orders on ACES."

Day traders are said to prefer ECNs because of the fast execution speed some of them provide. For broker dealers, particularly the big household names, there are three principal ways to get Nasdaq-listed stock orders to each other: via telephone, direct links like ACES, or via other routing networks. A broker dealer will usually have "profiles" programmed in his proprietary order management system, or a system purchased from BRASS, or else another vendor.

Agency [retail] orders for Nasdaq stocks that firms don't make markets in, or that they send to preferred market makers, typically go through ACES.

Allocate Orders

Brenda Blackard, head of equity trading for Davenport & Company in Richmond, Virginia, explains how her firm allocates orders and uses ACES. "We can go in from my market marker side in stocks that we make a market in, or through our trading system that lets us set limits on what we want," she said.

However, an order under 5,000 shares is usually routed through ACES and is executed automatically. But Davenport also uses direct hook-ups outside ACES with major execution firms such as Bernard L. Madoff Investment Securities, Knight Trading Group and others. "We like to touch orders over 5,000," Blackard said. "We do what's called shipping an order.' Without ever having to call somebody or using the Nasdaq terminal, I can send an order even over 10,000 shares via ACES to somebody we don't have a direct hook-up to, but who we know will do a good job."

Blackard says Davenport is very picky about where it sends orders. "I will never send an order to someone unless I know somebody at the firm," she said. "If I have a problem, I have to be able to pick up the phone and say, for example, you've been working on this order for two hours, but I really need to get it filled today. Tell me what I need to do."

If Blackard gets what she calls a "crummy execution," she wants to know the person she will call for help.

Direct links take a lot of maintenance, so Davenport is constantly changing its list. "I just had a case where the person at a firm I was doing business with got let go. I didn't know anybody else at that firm," Blackard said. Nobody at the firm called to introduce himself, so Blackard is no longer giving the firm any business. "If I'm sending you a hundred orders a day, and I got somebody who bought 100 shares and should of sold it, I gotta' have somebody I know to call to fix it," she said.

In addition to deleting the Auto-ex feature in 1998, Nasdaq has made the following improvements to ACES. Last October it enhanced the matching of orders and executions by matching open orders based on entry date, branch identification and sequence number, and the market maker/order entry firm relationship.

"This enhancement improves the controls of the process so that the possibility of open orders with similar characteristics being mismatched, something that occasionally happened in the past, never happens now," Nasdaq's Lipof said.

In November, Nasdaq added a feature that labels not-held orders on order instructions. The Nasdaq market also added an application programming interface (API). It allows firms to connect their in-house order management systems and their proprietary trading software to ACES. "With an API, they don't have to use our software to connect to our server; they can use their own," Lipof said.

The biggest change was probably the introduction of WebLink earlier this year. It offers access to ACES through a Web browser. In addition to receiving price quotations, WebLink also permits firms to send orders directly to their market maker's trading systems via ACES. This eliminates the need to use telephone or e-mail communications.

Better Connectivity

Although it was originally designed to assist smaller firms in distant locations, WebLink improves connectivity. For example, NWII, the Nasdaq terminal connection, can provide a link if a firm's direct communication is lost. "If my system is down, I can go through my Nasdaq terminal where I have ACES minimized on the screen so that I can just point and click when I need something," said Davenport's Blackard.

Actually, the firm's system did go down. "We were updating manually on our Nasdaq terminal," Blackard said. "We got a little swamped, but we were still able to function until our main systems were brought up again."

If for some reason, neither of these connectivity routes is working, a large firm could connect to ACES through WebLink, which is a comforting thought for an IT manager.

ACES has provided a way for smaller order management system vendors to challenge the big OMS systems, according to some industry officials.

These vendors facilitate the trading process, including the posting of quotations displayed to other network participants.

Adam Ross, the lead strategist for Bloomberg LP's order management product, says that ACES has made dramatic system improvements over the last couple of years. "They have allowed us to deliver an order management system that can compete with BRASS' B-Net" he said, referring to the BRASS OMS that many believe is currently dominant.

For its part, a SunGard spokesperson said its BRASS product is a trade order management system that enables users to route orders to external destinations, such as ACES. BRASS also tracks P&L for its broker dealer customers who run proprietary trading systems, a feature SunGard considers a strong selling point.

Grandma Charles

Users, however, cite one problem with ACES, which is that changed orders are reportedly sometimes lost. "Suppose Grandma Charles in Sarasota asks her broker to buy her 100 shares of Microsoft and the broker routes it through ACES to a large firm. Then she amends her order to buy 200 shares. The order can get lost," Ross said.

Blackard agrees, saying that this, in fact, happened to her. Still, both think that the fault is not with ACES, but with the receiving firm that may not have programmed its software to be completely compatible with changed orders. This is a problem at large firms that have massive systems, which are sometimes slow.

A Nasdaq spokesman, Wayne Lee, said that sometimes the recipients of amended orders routed through ACES, "are not able to process those amended orders because of issues at the receiver's end."

"ACES literally accepts and completes hundreds of amended orders every trading day," he added, "so we are confident that this problem does not lie within ACES."

Michael Ray, a pro who wanted to trade stocks since he was a teenager, had once considered a career as a retail broker. "I soon realized that a retail broker is in a sales position and is not a trader," he said. "So I steered towards the institutional side."

It all began after he received an undergraduate degree in business from Towson State University. Ray's first professional job was in 1987 for Legg Mason, which is based in Baltimore, Maryland.

And he has been with the firm ever since.

In the Backoffice

Ray started in the backoffice, in the purchase and sales department. He later became an assistant trader and then a vice president and head trader. He now overseas all the trading for Legg Mason Funds Management. The desk has three traders. Assets under management are approximately $20 billion.

Ray work's for a storied firm. Raymond Mason founded Legg Mason in 1962. In fact, he is still chairman and chief executive. In 1970, he merged his firm with Legg & Company in 1970, a firm that was founded in 1899.

"Being a mid-level firm has many advantages," Ray said. "One that has been very important to me is training. I was able to learn many aspects of the business such as settlement, seeing a ticket go through the system and so on. Also, I have access to many high-level people in the firm."

Legg Mason has some of the top portfolio fund managers in the world, including Bill Miller. He is the only portfolio manager to beat the S&P 500 for the last eleven years. (A book published on his philosophy is called, "The Man Who Beats the S&P: Investing with Bill Miller.")

Every morning, Bill Miller and the other PMs have a meeting with the traders. "We talk about pertinent news, we review transactions, we talk about order flow," Ray said. "We also try to give the PMs market color. It's kind of like market intelligence."

Ray undoubtedly believes that the trading business is much harder now than just a couple of years ago. One big problem he identifies is decimalization. "I think it has resulted in much of the volatility," Ray said.

But he is undeterred. Ray believes that this is an opportunity for traders to be creative and to stand out. "I look at my role as having a fiduciary responsibility for making the right trades," Ray said. "All too often traders fail in this regard and they let the market or computers do the work."

At Legg Mason, the PMs have a strong value orientation. Ray has both short-term and long-term price targets. Moreover, throughout the trading day, he constantly monitors the market and tracks each security. "Our philosophy is to trade when we can, not when we have to," Ray said.

To that end, Ray says he depends heavily on sales traders on the Street. "This gives us a decided edge," he said. "We are very demanding. And our goals are very clear. We want efficiency and we want the best coverage that the sellside would give any other top client."

That goal is critical in the current environment. "The market definitely needed to come down," Ray said. "Valuations were outrageous. But this is a great environment for a value approach. Investors need to look for great management that can generate moderate growth."

Ray said that investors should no longer expect 12 percent or 15 percent annual returns. Instead, he thinks annual returns will settle around 5 percent to 6 percent. "I think about 2.5 percent of the return will actually be dividends," he said. "So, yes, things have really changed over the past few years in many ways."