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Herzog, Market-Making Pioneer, Now Lags
the Leaders: Spotlight
Bloomberg News
September 3, 1999, 8:52 a.m. PT
Herzog, Market-Making Pioneer, Now Lags the Leaders: Spotlight
Jersey City, New Jersey, Sept. 3 (Bloomberg) -- E.E.
''Buzzy'' Geduld scans the portraits and autographs of political
figures on his office wall and points to a dollar bill signed
''The Buck Stops Here'' by Harry Truman.
It's no wonder. The chief executive of Herzog Heine Geduld
Inc. must make a crucial decision that will forever change the 73-
year-old market maker in Nasdaq stocks.
Geduld's firm has been overtaken as the industry leader by
Knight/Trimark Group Inc., a relative newcomer flush with $600
million from public stock sales and built-in business from part-
owners such as Internet broker E*Trade Group Inc. Herzog Heine
must now resolve whether it too should sell stock and enter a
veritable arms race with its rival.
While analysts endorse public ownership, it's no sure bet
with Geduld, a former donut shop owner who's helped guide Hezog
Heine from paper transactions to computerization since rising
through the ranks to senior management in 1986.
''With valuations the way they are, it's a natural thought''
to sell shares, the 56-year-old Brooklynite said in his office in
a gleaming Jersey City, New Jersey, office tower. ''We're
thinking about a lot of things, but there's nothing imminent.''
Herzog Heine's business is to match buy and sell orders from
brokerages, institutional investors and other securities firms.
It sometimes puts its own capital at risk to get the best prices
for its customers. It profits by either charging for execution of
orders or by trading for its own accounts.
What to Buy
With money from a stock sale, Herzog Heine could spend more
on new computers and advertising to grab additional market share,
analysts said, something Knight/Trimark is doing plenty of.
''I've told them, 'You've got to go public to raise capital
to expand,''' said Amar Mehta, an analyst at CIBC Oppenheimer
Inc. Herzog would be worth $1 billion to $1.5 billion as a public
company, he said, compared with $3.5 billion for Knight/Trimark.
As a public company, though, Herzog Heine would be subject
to regulatory disclosure and shareholder accountability
requirements, hassles some firms would just as soon do without,
especially if things are going well.
And they were for many years at Herzog Heine. It was the
industry leader by being the first to use computers to track
stock trades in 1983-84. It also beat its competition by opening
in Europe in 1996. It now makes markets on the London Stock
Exchange, Easdaq and Deutsche Bourse.
''We wrote the book on electronic trading 15 years ago,''
said Geduld, who's not afraid to make changes late in the game.
He married for the first time eight years ago, at 48.
In the past three years, however, Knight/Trimark has blown
past Herzog Heine to occupy the No. 1 spot, relegating Herzog to
third, based on number of trades executed.
Family Ties
The brainchild of a former Herzog Heine technology
executive, Knight has been propelled by order flow from its
founders, which include some of the biggest Internet brokers, and
capital from two public stock sales that's been used to buy the
latest technology.
Knight quickly added computers ''so they could handle all of
this rapid growth in order flow and profit by it,'' said Scott
Appleby, an analyst with BancBoston Robertson Stephens. ''It's
not that Herzog's not smart, it was just difficult to overcome
Knight's advantages.''
With $290 million from a July 1998 initial stock sale and
$315 million from a second sale February, Knight plans to spend
$10 million on mass-media advertising in the next 12 months.
''I wish I had the kinds of resources to do that,'' Geduld
said. He said Herzog will spend far less on advertising,
declining to specify an amount.
Herzog Heine isn't standing still. It's added 20 traders'
seats in six months to give it 200. It will spend unspecified
millions to increase computer capacity to 1 million trades a day
from 750,000 within the next year, Geduld said.
It's also continuing to expand overseas. The firm's London
office opening in 1996 preceded Knight's by almost three years.
Foreign Affairs
''We are actively in discussion with several European
institutions about handling their order flow,'' said Stephen
Nelson, vice president of administration for Herzog.
In the first quarter, the firm executed 101,100 trades
daily. It now executes about 150,000 on a ''normal'' day, up from
35,000 a year ago, Geduld said.
Trouble is, Knight has grown even faster: it should chalk up
a fivefold trading increase this year versus last. The market
value of Knight, which averaged 340,000 Nasdaq trades daily in
the second quarter, has more than quadrupled from about $750
million at its IPO in July 1998.
The orders Knight gets from its owners, including E*Trade,
Ameritrade Holding Corp. and TD Waterhouse Group Inc., account
for about half its total volume. Thus it benefited from the bull
market in Internet stocks. It now handles 17 percent of Nasdaq
Stock Market transactions compared with 7.5 percent for Herzog.
''If I had to put my finger on one reason why Knight's grown
so fast, it's equity ownership: their partners are their
owners,'' Geduld said.
Following the Leaders
Herzog Heine also trails second-ranked Mayer & Schweitzer
Inc., which benefits from orders from its owner, Charles Schwab
Corp., the biggest Internet broker.
But it's the rivalry with Knight that's the most personal
and immediate. Knight's executive vice president and co-founder,
Walter Raquet, led Herzog's technology efforts for a decade
before leaving in 1992. The two firms also share the same office
tower. And one of Herzog's biggest customers is E*Trade, which
owns 3.3 percent of Knight/Trimark.
Electronic stock trading is a world away from the early
professional experience of Geduld. He and his brother Irwin, the
sons of a hotelier, started a chain of donut shops in 1964. After
a stint as an Army cook, 25-year-old Buzzy -- whose nickname came
from a children's book -- began stopping by Herzog Heine in the
afternoon, when the donut business was slow, to mark up trade
tickets for Irwin, who had joined the firm as a trader.
Chairman John Herzog, now founding chairman of New York's
Museum of American Financial History, offered Buzzy a job in
1968. He became head of trading in 1976, president in 1986, and
the firm's third CEO in April 1998.
Now he's trying to combine technology with sheer grit to
keep Herzog Heine competitive.
''We'll make mistakes, but we do our best and you won't
regret using us,'' said Geduld. ''We're No. 3, so we try three
times as hard.''
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