Share Dealers Shaken Up by Market Changes
Sat Apr 13, 8:05 AM ET
By Mark Weinraub
NEW YORK (Reuters) - Share dealers have suffered through the perfect storm in the past year: A downtrodden market, the shift to trading stocks in decimals rather than fractions, and declining volume.
And the weather is only going to get worse.
Traders, scrambling for ways to reap the bumper profits they enjoyed during the late 1990s bull run, are now forced to slash prices as competition heats up for pieces of a pie that is getting smaller, while also dealing with outside shocks to the market.
"Most of us look at this as a difficult environment because of external events," said Bernard Madoff, chairman of Bernard L. Madoff Securities, in reference to the economy, the situation in the Middle East and problems related to Enron.
"The industry is going to be forced to do damage control," he said, which includes more layoffs, cost cuts and lower salaries.
Downturns in the stock market have hit dealers that trade for their own accounts, such as New York Stock Exchange (news - web sites) specialist firm LaBranche & Co. Inc. and Knight Trading Group Inc. , one of the largest dealers of Nasdaq shares.
Structural changes in the Nasdaq stock market have hit traditional dealers such as Knight as well as companies that run alternative networks like Instinet Group Inc. .
Both Knight and Instinet, which is majority owned by global news and information company Reuters Group Plc , have warned investors to brace for losses when they report first-quarter results next week.
"Things are bad," said Antonia Ness, a research associate at brokerage firm Raymond James & Associates. "That's what they keep telling us. We don't anticipate a lot of surprises because we think that they've told us what's going to happen."
Trading volume has slipped on Nasdaq recently as investors, coping with nearly two years of losses, have turned sour on stocks. Instinet, facing strong challenges from its more nimble rivals such as Island ECN and a newly merged Archipelago and REDIBook, saw its share volume drop by 40 percent in March.
Besides the volume slide, Jersey City, N.J.-based Knight has suffered from the shift to trading stocks in pennies rather than fractions. Since the switch, trading spreads -- the difference between what a buyer and seller are asking for the price of a stock which are pocketed by share dealers like Knight -- have narrowed by an average of more than 50 percent.
"I think some of the economics of the models don't seem to be working," Ness said.
Knight has begun charging commissions on some trades, rather than taking the spread, in a bid to recoup some of the lost revenues. Instinet, in the face of price cuts by its rivals, has also slashed its fees.
Nasdaq share dealers also are gearing up to face a new competitor, the American Stock Exchange. Amex dealers plan to start trading stocks of Nasdaq-listed companies for the first time in May.
Both Knight and Instinet also face questions about their leadership.
Knight founder and chief executive Kenneth Pasternak stepped down in January. Knight initially named Peter Hajas, its president and chief operating officer, as interim CEO, but gave Anthony Sanfilippo, head of global equities at Knight, the position before Hajas could assume the office. Knight never provided an explanation for the switch.
At Instinet, Chief Executive Doug Atkin stepped down in a surprise move on Tuesday. Instinet may be looking to merge with a rival or Reuters may buy back the 17 percent of Instinet's shares it sold to the public less than a year ago, the Financial Times reported recently. Since the IPO, Instinet's stock has fallen 54 percent from its public debut of $14.50.
Of the share dealers reporting their first-quarter results next week, only one, Investment Technology Group Inc. , is expected to show profit growth. ITG, as it is known on the street runs the Posit trading system, which automatically matches up shares anonymously. But ITG hedges its bets, generating substantial revenues from other businesses such as providing research to clients. |
