Aeroflex

Despite the blaze of publicity for Aeroflex, the first stock since 1939 to be voluntarily delisted from the New York Stock Exchange, the stock does not seem to have triggered fireworks in Nasdaq trading. The microelectronics manufacturer, trading under symbol ARXX, took advantage of last summer's loosening of Rule 500 by the Big Board to switch to the tech-heavy Nasdaq. Market makers seem vaguely disappointed ARXX doesn't trade more actively. The average daily volume since its March 21 debut on Nasdaq is about 600,000 shares. That's comparable to the average 270,000 Aeroflex shares traded daily for the past year on the Big Board. The two-fold increase is attributed largely to dealer-to-dealer transactions on Nasdaq. The price on Nasdaq recently dropped eight points to $41 a share, trading within a range of about $5 to $7.

"Trading is a little thin," one trader confided. "I think that's because there's not much sponsorship at the moment. No one has any loyalties to the name." ARXX is considered something of an orphan. The stock lacks the robust sales and trading support that accompanies a strong IPO or secondary offering. Neil Richard, a trader at institutional shop Brean, Murray, is a little more upbeat. "Sometimes it moves on very little volume until it finds a level where people have business to do. Then it will stabilize for a while," he said. Top market makers in ARXX are CIBC Oppenheimer, WIT/Soundview, and Merrill Lynch. Morgan Stanley Dean Witter, which picked up the stock, is expected to be a force.

OptiMark

Bill Lupien will assume a more hands-on role in running OptiMark. Lupien, who had a recent bout of illness, arrives on the scene as volume on OptiMark hits new lows, an estimated 100,000 shares on some days. At its peak in 1998, OptiMark's volume reached as high as 1.5 million shares daily. A connection to Nasdaq that could boost volume is reportedly on hold because of a dispute with electronic communications networks. Last December, the 390-person company fired about 50 staffers and followed later with more pink slips.

@Harborside

OptiMark's struggle is not unique. Jefferies & Co. has temporarily shuttered @Harborside, the firm's web-based institutional trading system. The firm is hoping to relaunch @Haborside in the coming months. The system, launched with great expectations by Jefferies in May last year, facilitates block trading, matching indications of interests among anonymous institutional buyers and sellers. Lack of liquidity spelled the end of a seven-month struggle for block transactions. At its peak, @Harborside was facilitating trades in the 20,000- to 400,000-share range.

A successful relaunch hinges on a plan by Jefferies to attract a critical mass of liquidity. Richard Holway, the former buy-side trader who conceived of the @Harborside concept and ran the operation, offered no details. But he suggested in a brief interview that an enlarged sales force would be helpful. A spin-off for @Harborside is possible, although the firm would likely retain a significant ownership stake, according to a Jefferies spokesman.

Power Brokers

With the firm's volume topping just over 1 million trades in a record-breaking Nasdaq and listed session one day earlier this month, Knight/Trimark Group's business is booming. The firm is shifting management with founders Ken Pasternak and Walter Racquet taking new responsibilities. Pasternak remains as president and chief executive of Knight/Trimark and Knight Securities. But he sheds his role as head of Nasdaq trading. That responsibility will be handled by the duo Randall Taylor and Scott Littman. Raquet, executive vice president and chief operating officer of Knight Securities, becomes chairman of Knight International. He will seek to develop opportunities overseas.

Meanwhile, Knight/Trimark appointed David Shpilberg chief operating officer, chief technology officer and executive vice president. Shpilberg, who steps into a newly-created post, comes from Ernst & Young, where he was the chief technology officer. He will play an active role as Knight spends heavily on technology for electronic trading, information management and global systems integration. The firm said it plans to spend $100 million on technology projects over the next 18 months.

Regional stock exchanges are a likely choice for initial SEC action as the agency cracks down on margin lending abuses at day-trading firms, according to a high-powered attorney who represents dozens of brokerages and several regional exchanges.

George T. Simon, a managing partner and head of the broker dealer regulatory practice at Foley & Lardner, said margin lending subterfuges often occur because violators are regulated by regional exchanges.

Regional exchanges aren't equipped to deal with sophisticated abuses off the exchange floor, he explained, and the SEC is loath to intervene in local affairs.

The National Association of Securities Dealers and the New York Stock Exchange also are not equipped to deal with the problem, he said.

As a result, he contended, SEC regulators would start with the regionals as concerns about margin practice grows.

"There has been increasing concern, given the volatility of the markets due to day trading and speculative trading, online brokers and the like," Simon added.

Rich Pickings

While SEC actions could reap rich pickings for securities attorneys in private practice, some broker dealers remain anxious as regulators warn about the dangers of shoddy margin arrangements.

The SEC recently sued broker dealers, All-Tech Direct and Investment Street Co., as well as nine associated individuals, for providing loans to day trading customers in excess of federal margin lending limits.

SEC lawyers have been quoted in press reports saying these are the first such actions by the commission against margin abuses at day trading firms.

In a speech in Los Angeles, SEC Chairman Arthur Levitt said, "In the past two months the level of margin debt has surged even faster than the stock market. In too many cases, investors are focusing on the upside without carefully considering the downside."

Start of Crackdown

Lisa M. Mezzetti, a consumer litigation partner at Cohen, Milstein, Hausfeld & Toll in Washington, said there's no way to know if the SEC action represents the beginning of a crackdown. The SEC isn't saying.

"But certainly when they pick these day trading companies and do them two at a time, there is a message, that we're going to act when necessary," Mezzetti said.

Simon added, "What you've got is a background in which people have figured out ways to do things that the people who drafted the margin rules never thought they could do."

Free-wheeling brokers have been experimenting for years with ways to get around federal margin lending limits, Simon asseerted. They require investors to put up cash equal to 50 percent of the value of securities they want to buy.

One strategy, called "good safe margin," involves creating a "joint back office" through a limited liability corporation, Simon explained. Investors in the LLC can use their equity in the company to exempt themselves from margin requirements, up to whatever limit their trading firm will tolerate.

Trading firms also use cash accounts to sequence trades so that accounts settled within the legal margin limits (usually by the end of each trading day, or within three trading days), are never legally triggered, according to Simon.

Lending Limits

The Federal Reserve has issued instructions warning that this practice is inconsistent with federal margin lending limits, Simon said, though the rule isn't yet well publicized.

Mezzetti said margin lending abuses put broader markets at risk. Novice investors can be ruined by unexpected margin calls, she noted.

Over-extended investors might also sell into a market that's sliding downward, she added. Depending on their exposure, that could make a bad situation much worse. Mezzetti says the SEC action addresses bigger issues of market health. "I think that is appropriate," she said.

Given the provocative title of the Senatehearing – Day Trading: Everyone Gambles But the House – perhaps Harvey I. Houtkin's reaction is not surprising.

"It wasn't an investigation," said the crusty chief executive of All-Tech Direct, a day trading firm based in Montvale, N.J. "It was a crucifixion."

The two-day hearing in late February alternated between emotional recollections of last year's shooting rampage by distraught Atlanta day trader Mark Barton, and emotional rebuttals by Houtkin and other day trading firm executives.

It was leavened by testimony from the Securities and Exchange Commission. The lawmakers heard testimony from the SEC documenting alleged abuses by day trading firms, and by the National Association of Securities Dealers Regulation, which detailed pending NASD oversight proposals.

Yet for all the fire exchanged at the Senate Permanent Subcommittee on Investigations, Houtkin, a pioneer of rapid-fire SOES day trading in the last decade, believes the issue is dead.

"The impression I got was, they went through the motions, and it's over," he said.

Heart of Problem

"The problem with all this stuff," explained Saul S. Cohen, a partner at the law firm of Proskauer Rose in New York, and counsel to the Electronic Traders Association, "is that it's not clearly defined as to what advocacy, or new public policy arguments, are aimed at."

Cohen, who did not attend the hearings, compared some of the proposals to rein in day trading abuses to the debate a decade ago over the federal Racketeer Influenced and Corrupt Organizations (RICO) Act. Like RICO, Cohen said, the new day trading controls are meant to be applied against a small group of devil-may-care firms that play fast and loose with the law.

But also like RICO, he said, "When you try to write a laser-like law, it doesn't work that well, because you have equal protection and due process concerns. And when you try to broaden it, you catch a lot of upstanding firms that would not otherwise have run afoul of that law."

Cohen said that day traders break down into two distinct groups. The first group comprises on-site' traders. These are professionals, with years of experience, working alongside other professional traders in high-tech offices. Management closely monitors results to ensure its substantial investment in technology is being recouped, he said.

The second group comprises online' traders, Cohen said. These traders work from their homes, or from remote, satellite offices, using services provided by companies such as Charles Schwab & Co., E*Trade and PriceWaterhouse. Most of the abuses, Cohen contends, occur in the latter settings.

"Regulation that recognizes that day trading should be some kind of profession is fine with ETA," Cohen said. For example, margin lending requirements should be scaled to the amount of security a trader is willing to deposit. The larger the deposit, Cohen said, the more money could be lent on margin, since wealthy traders can afford to lose more of what they borrow. An NASD Regulation proposal reflects this philosophy, he noted.

Cohen said ETA member firms already require as much, if not more, risk disclosure to potential customers as NASD Regulation proposes. But disclosure should also consider which group of traders will be affected, he said.

On-site day traders see the risks sitting next to them everyday, he said. "You would have to be brain dead not to know what's going on," Cohen said.

On-site managers already carry out forceful risk disclosure, he said, since they need successful traders using their technology to justify its expense.

Yet other brokers share the SEC's and Congress's apparent concerns about day trading. "We have looked at day trading somewhat cockeyed all along," said Robert H. Yevich, president of Tucker, Anthony, Inc., in Boston. Yevich said his firm steers clear of the highly volatile and comparatively low-volume business day trading involves.

"It's tough enough when you know what you're doing," he said. "[Day trading] is more akin to Atlantic City, or Las Vegas. It's not investing."

Yet day trading activity is making it difficult for his brokers to execute trades early in the morning and late in the afternoon, when day traders are most active, Yevich said.

In a downturn, the extreme volatility could make a bad situation worse, he added. Firms must also take some responsibility for traders they entice into the markets, Yevich noted. "The government shouldn't allow people to commit financial suicide, and let trading firms say it's not my responsibility," he said.

Proponents of Section 31 fee relief have had their hopes buoyed by the introduction of the Competitive Market Supervision Act by Senate Banking Committee Chairman Phil Gramm (R.-Texas).

"This is a real improvement," said Lee Korins, president of the Security Traders Association. "It's the first time in my memory that the SEC, in the person of [chairman] Arthur Levitt, has come out in favor of one of the approaches."

In prepared testimony to a committee hearing in New York City, Levitt said, "We look forward to working toward this bill's passage through a reasoned and inclusive dialogue with you and other interested parties."

Nerve Center

Gramm's S. 2107 would also reduce fee rates on securities registration, and on mergers and tenders, to $67 per $1 million valuation through 2006, and $33 per $1 million thereafter.

Gramm told securities industry leaders at the hearing, "I never come to Wall Street, I never come to the financial markets in New York City, that I don't become acutely aware that this is the nerve center of American capitalism. And knowing what capitalism has meant to America and the world, to me this is a holy place."

Securities industry leaders have complained that Section 31 transaction fees are levied in amounts far in excess of regulators' needs. The fees are ostensibly collected to support functions of the Securities and Exchange Commission. In fact, the fees are turned over to the federal Treasury's general fund and then reallocated by Congress to the SEC and other federal programs.

Levitt noted in his testimony that Section 31 fees alone will raise $486 million (of nearly $2 billion collected through various SEC fees) in fiscal 2001, toward an agency budget of $423 million. Korins calls the amount "unconscionable… This is no longer a fee. It's an out-and-out tax."

Getting a Break

James Spellman, a spokesman for the Securities Industry Association, applauded Gramm's bill for addressing other securities fees as well. "In our view, by reducing these fees, we could save investors $7.9 billion over five years, and $14.4 billion over 10 years," Spellman said, adding, "Of course, it's imperative that the SEC be fully funded."

Korins said he expects Gramm's sponsorship will carry weight with other members in moving fee reductions through Congress. Yet he also expects Congress will insist that lost fee revenues be made up. Those lost fees would include sums now collected in excess of SEC budget needs.

Spellman noted that this debate will take place against the backdrop of election year plans for a projected federal budget surplus, and efforts to ensure a sustainable Social Security program.

White House

President Clinton has not indicated whether he will support fee reduction. Spellman said he'll be watching the Office of Management and Budget for a signal of Clinton's intent.

"There is broadening support on the Hill" for fee reduction, Spellman said, while warning "it's too early to say" whether proponents can carry the day.

"We are more optimistic this year than we've been in a few years," Korins said. "Though, as I've always said, when money goes to Washington, it's tough to get it back."

Three Congressional bills would put a lid on Section 31 fees.

Senator Phil Gramm's S. 2107 would cap total Section 31 fee collections on a sliding scale, from $413 million in fiscal 2001 to $884 million in fiscal 2010 and thereafter. That's a formula slightly less generous than New York GOP Rep. Vito Fossella's H.R. 1256.

H.R. 2441, by New York Republican Rep. Rick Lazio, would reduce the fee from its current 1/300th of 1 percent on the value of transactions, to 1/500th of 1 percent.

The Independent Broker Dealers Association is getting a boost out of the proposed sale of Nasdaq, according to the president of the Long Island, N.Y. based group. "People are joining IBDA because of this [proposed sale]," Alan Davidson said.

IBDA, which represents small broker dealers, is receiving 10 to 12 checks a day by mail from National Association of Securities Dealer firms concerned about the sale of the Nasdaq exchange, according to Davidson.

Davidson urged NASD member firms to vote against the proposed sale of Nasdaq.

Notifying Members

An NASD board member, Davidson made his comment after NASD chairman Frank G. Zarb's March 12 media teleconference on the proposed sale. The teleconference informed reporters that private placement and proxy letters had been sent notifying the NASD's roughly 5,500 member firms of the proposed sale.

Zarb said the current arrangements require NASD regulatory services to be financed out of members' dues. The sale of Nasdaq provides funds to modernize and to reduce dues.

Nonetheless, other small broker dealers may not share Davidson's view. Nicholas C. Cochran, chairman of the NASD's National Adjudicatory Committee and a director of the California Independent Broker Dealers Association, said the sale would benefit smaller broker dealers.

"Frankly, in my view, they have been neglected for quite some time," he said. The sale would allow the NASD to concentrate on its proper role as a trade association, he added.

Single Regulator

Davidson also argued that a February proposal, by five large broker dealers recommending a single market regulator for all U.S. exchanges, would eviscerate the self-regulatory aspect of Nasdaq. The proposal is pending before the Securities and Exchange Commission.

Combined with the transformation under private placement of exchange governance from "one firm, one vote" to "one share, one vote," Davidson argued that smaller NASD member firms would thus be placed at a serious disadvantage.

Zarb Counters

But Zarb said during the teleconference that, "No one appears to be disadvantaged," by the proposed sale. "Not to do this would be a major, major downer for the future of both the Nasdaq and the NASD."

The NASD chairman said developments in the debate over central regulation would clarify the NASD's position. He noted that the regulatory structure could not be changed without the organization's approval.

"I believe that when that becomes clear, that we will all see that there's not likely to be any connection between what's happening here and the debate over a central regulator, which is probably going to go on for years, because it's gone on for years," Zarb said. "If there is a serious debate about a central regulator, [it will] accrue to the benefit of the NASD going forward," he added.

Lone Dissident

Davidson was cited by name during the March 12 teleconference as the lone dissident on the NASD Board of Governors in opposition to the proposed sale of the exchange. Davidson emphasized he could speak for the record only as president of his Jericho, N.Y. company, Zeus Securities, and of IBDA, which he said represents about 250 NASD members firms. "There's very substantial support for our position," he said.

During the teleconference, Zarb lauded Davidson's "time and effort helping to ensure that the small broker dealer interests were cranked into the final model" for private placement.

Davidson said he was, until recently, receiving two calls a day from NASD members soliciting his support. "Lately they've stopped calling," he noted. "I think they're starting to get the message." He said comments by SEC Chairman Arthur Levitt support his contention that the single regulator debate is on hold now only because the commission has more pressing matters on its agenda.

Daniel Schaub was named head of Nasdaq trading at A.G. Edwards in St. Louis. He succeeds William Sulya, who retired from the firm in February. Schaub was previously director of investment banking at A.G. Edwards.

Crowell, Weedon & Co. in Los Angeles added two new Nasdaq market makers: Joe Kim and Marc Oliver, both from Sherwood Securities, now called NDB Capital Markets.

John McCarthy, the former assistant director of compliance inspections and examination at the Securities and Exchange Commission, joined Knight/Trimark Group as the firm's chief regulatory affairs officer.

Linda Ludeke joined Davenport & Co., LLC in Richmond, Va., as a vice president on its OTC trading desk. She was formerly with Scott & Stringfellow for over 20 years.

ING Barings in New York beefed up its Nasdaq sales and trading desk with four new hires: Raymond Valazquez, previously with CIBC World Markets, joined as head of Nasdaq trading; Brad Wilson, also from CIBC World Markets, joined as a senior equity sales trader; Edward Kovary, Jr. from Bank of America Securities, and Michael Weitzner, formerly with Goldman Sachs, both joined as senior Nasdaq traders. All are managing directors. They report to Bob Betack, head of equity markets for the Americas.

John Cronin, previously a senior trader with Chase H&Q in San Francisco, joined C.E. Unterberg, Towbin in New York as a Nasdaq market maker.

IPC Communications and its subsidiary, IXnet, named James M. Demitrieus as president and chief operating officer. He succeeds Gerald E. Starr, who will continue to work with both companies heading up global business development.

Marc Gresack was named president

of Philadelphia-based Ashton Technology Group, a subsidiary of Universal Trading Technologies. Gresack was previously a senior vice president and principal at Instinet Corp.

Edward Annunziato joined Wit Capital Europe Plc. as chairman and chief executive. Annunziato was previously with Merrill Lynch, where he co-headed investment banking for Europe, the Middle East and Africa.

Wit SoundView in New York appointed Max Palmer as chief information officer. Palmer was previously chief information officer at the National Securities Clearing Corporation.

William Gult, previously with Wasserstein Perella, joined Buckingham Research Group as a sales trader.

Tucker Anthony Cleary Gull in Milwaukee hired Steve Cass as a market maker for its Denver office. He was previously with Melvin Securities in Chicago.

Jocelyn DeCloux, previously with Everen Securities, joined Robert W. Baird & Co. in Milwaukee as a Nasdaq trader.

First Security Van Kasper in San Francisco added two Nasdaq market makers: Spencer Giesea, formerly with Spear, Leeds & Kellogg, and Peter Zavial from Bank of America Securities.

Thomas Weisel Partners in San Francisco named a new partner and beefed up the trading desk. Tim Heekin, a partner and director of trading, was named to the executive committee. The firm hired a slew of market makers: Jack Monopoli, Peter Cordts and Mike Healy, from Volpe Brown Whelan & Company; Victor Belmonte, formerly with Hambrecht & Quist; and Steve Boeckmann from Preferred Capital. Thomas Weisel also deepened the sales trading team. Kevin McEneaney, formerly a senior managing director with Bank of America Securities, joined as a partner; Andy Mosby came from Lehman Brothers; Ken Carpenter from Bank of America Securities and Ilisa Kane from Schroder & Co.

Investment Technology Group (ITG) in New York named Ananth Madhaven, a former professor, as the firm's managing director of research. She was previously professor of finance and business economics at the University of Southern California's Marshall School of Business. Madhaven replaced David C. Cushing, who was appointed chief executive of Edge Capital, a new ITG subsidiary.

The Montreal Exchange appointed Luc Bertrand, a vice president and managing director at National Bank Financial in Montreal, as president and chief executive.