10/25/99 Inv. Dealers' Dig. (Pg. Unavail. Online)
1999 WL 19514278
Investment Dealers Digest
Copyright 1999 Securities Data Publishing
Monday, October 25, 1999
Hyper-Aggressive Day Trading Firm Wants to Take On Third Market Giants:
Automated Trading Desk Inc. prepares to morph into an e-market maker
Heike Wipperfurth
One of the nation's more electronically savvy day-trading firms is
trying to transform itself into a trading force capable of competing
with Wall Street's proprietary trading desks and third market trading
giants like Knight Trimark Group Inc. and Bernard L. Madoff Investment
Securities Inc.
And if its recent past is prologue, Charleston, S.C.-based Automated
Trading Desk Inc. has a shot at accomplishing that grand plan.
Founded in 1988, Automated Trading's hyper-growth began in 1994, when
it opened a new subsidiary called Mount Pleasant Brokerages Services
Inc. That unit now day trades mostly Nasdaq stocks for a few high-net
worth customers and a big Wall Street firm that it declines to identify.
But the trading volume at Mount Pleasant, which does all of the trading
for Automated Trading, has exploded to what it now says is a per-day
average of 10 million shares with an aggregate value of almost $500
million.
"Knight and Madoff are pretty technologically aggressive," said Josh
Levine, who built the software behind Datek's Island ECN, one of the new
electronic systems that are changing the way securities are traded. "But
they don't do what Mount Pleasant Brokerage Services does. It doesn't
have a fixed business model that it's trying to protect. Its business
model is: Let's do everything new, see how it works out and how cool it
is."'
Indeed, Mount Pleasant was the first firm to sign up with Island when
that ECN began operations about three years ago. Mount Pleasant also
connects to most other major electronic communication systems, allowing
its computers to search for trading opportunities in thousands of stocks and enter orders in rapid-fire fashion.
The major forces behind the ambitious trading operation are David
Whitcomb, a finance professor in New York who came up with the idea to
trade limit orders electronically based on mathematical algorithms, and
Jonathan Butler and Steven Swanson, two programmers who translated it
into the proprietary software that supports the firm's hyperactive
trading.
So far, Automated Data has kept a low profile, though Whitcomb, its
president and chief executive officer, frequently comments in press
stories on the industry's market structure issues. "We've been so much
in the closet, that's just the nature of us," he said. That's about to
change, though, as the firm wants to expand into trading for several
institutional and brokerage customers and operate as a market maker for
Internet retail brokerages.
They don't get tired'
Playing the key role in that transformation from day trader into
market maker is, of course, technology. "Our computers scan 6,000 stocks
every single second," Swanson said. "They don't get tired, they don't
get worn out. They get us great executions all day long." It has 20
different trading models that point up sudden price movements of stocks
as trading opportunities, thus benefiting from the market's recent wild
ride. "The increase in market volatility is good for us," Swanson said.
That shows up in its bottom line. Automated Trading's revenue has
risen from $1.5 million in 1994 to $24.6 million in 1998, and is
expected to reach $56 million in 1999. Its profit has rocketed from zero
in 1994 to $12 million in 1998, and is expected to reach $36 million
this year, officials predict.
Like its competition, ATD wants to pay for the order flow from
fast-growing Internet retail brokerage firms that use rebates to
subsidize the rock-bottom commissions at many firms.
Swanson says that the software for its new venture is almost complete,
and that it may start running as early as next month. According to
Swanson, it will tell the firm instantly when to fill retail customer
orders from its own inventory, and when to go into the market to buy the
order for the customer. That differs from practices at some of the other third market firms, which typically wait to fill a customer retail order
when the market moves against them, Swanson said.
There appear to be a number of other growth opportunities for the firm
as the trading environment turns increasingly electronic. One is to
offer its trading services to more brokerage firms. It also wants to
focus on proprietary trading, and hopes for a big splash in listed
trading. "There is significant growth on the listed side because of the
antiquated specialist system that we all know will be broken at some
point next year when the NYSE goes public," said Rick Roberts, an
attorney at Thelen, Reid, Priest who does work for Automated Trading.
In addition, Automated Trading wants to trade on the Toronto Stock
Exchange through an electronic link with Versus Inc., a Canadian
Internet brokerage firm and connect to European markets through such
electronic communication systems as Reuters' Instinet and Bloomberg
Tradebook.
The firm currently has 23 employees, many of whom are programmers or
PhD researchers, and the expansion may boost that number to no more than
50, Whitcomb says.
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