glenn/ MARKC
got this from yamner trading desk; given brokerage discussion, might be interesting
"From: Steven Goldman, Yamner & Co., Inc., VP and Head Trader, &
Bernard Yamner, Yamner & Co., Inc., CEO
Good afternoon. A few situations this past week have prompted us to prepare a letter this
afternoon regarding the recent markets and the services that Yamner & Co., Inc. offers our
clients. There is a perception in the markets, that the marketplace for buying and selling
securities is an entirely equitable one. That is, that it is a fair system where rational and
linear trading of financial securities occurs. It is often not the case.
Over the past few years, the past 6 months in particular, the markets have begun to reach
record volumes and record volatility. As a result, drastic intra-day, intra-hour, and often,
intra-minute movements in securities occur across-the-board, in virtually all sectors of the
marketplace. We understand the complexities and work diligently to perform for our clients
even in the most tumultuous conditions. We take great pride in the commitment of our traders,
the quality of our technologies including the more than 27 execution and trading systems that
we use in providing some of the industries' highest quality trading and brokerage services.
Yet, there is something that all investors, all clients should know. While you may perceive
Yamner & Co., Inc. as ideal, there is no utopia, there is no perfect solution, 100% infallible
firm for handling your business. As in all facets of life, to expect perfection is reasonable.
In fact, we demand perfection from ourselves and our staff. Yet, on occasion, whether it be
through a failing of Yamner or simply a situation in the marketplace, perfection, in the mind
of the client, is not achieved.
When we perceive a needed change at Yamner, we do it. We do not hum and haw. We do whatever
it takes to make our business the best. There are things we address each day, from acquiring
better technologies to accommodating some our clients, our objective is providing the best
service on the Street. We continue to scrutinize our failings and make aggressive changes to
improve ourselves each and every day. We take nothing for granted.
Yet, while we can continue to positively make changes in our business, there are things that
simply can not be changed from our desks. The nature of the markets, the volatility of certain
stocks, the actions of market makers and other market participants are areas which are governed
by the NASD and SEC and regardless of the quality of our Trading Desk, may still result in what
the client perceives as less-than-great service.
There are a few situations that immediately come to mind when thinking of areas where clients
are inexperienced how truly volatile the markets can be and thus do not understand the
complexities of the marketplace and the environment in which our traders compete to secure you
the best prices. All of the situations involve trading OTC, Nasdaq securities.
While we could spend a day discussing OTC stocks and why in fact the Nasdaq marketplace creates
such problems, let me briefly encapsulate it as follows. Unlike the NYSE, where a single
specialist handles the matching and display of client orders, the OTC markets are comprised of
many market making firms, each taking a principal position in a particular stock. Each has
their own bid and ask, each with a varying size, which recently was permitted to be as little
as 100 shares. The market maker firms, regardless of where you go, are registered as
principals in the transactions, meaning that they in fact may trade against their clients'
orders. The profit and loss for these traders is derived by how much money they make against
client orders. You can see the clear conflict of interest. In fact, all Nasdaq trades must go
through such parties. Add the factors listed above, and you can imagine how difficult of a
marketplace the Nasdaq can often be to negotiate.
Within this already tough environment, market openings, from 9:30 till 9:50 and the last 5
minutes of trading are most difficult. The greatest percentage of volume usually occurs right
at the market open. Individual investors, hedge funds as well as other investors may give
their brokers or trading firms orders to buy "at the market open". Thus, the open experiences
heavy volume, exaggerated swings to the open. Again, when dealing with the Nasdaq, this is
entirely driven by market makers as discussed above.
So while during most other times of the day, from 9:50 through 3:50, when you call Yamner &
Co., Inc. you can expect an immediate fill and report, clients must understand that during the
opening few minutes, it is simply quite difficult to obtain such an immediate execution.
Sometimes they do come. Market orders on liquid stocks can be filled within 5, 10 seconds of
the opening. Yet there are times on more illiquid issues that our trades need to work the
trade, using whichever or how many ever of our 27 systems, to get you the best price. Quite
simply, to want an immediate execution at 9:30:01 is understandable, yet to expect an immediate
fill on all stocks, right at the opening, is unrealistic and is something, in the current
marketplace that can not be achieved.
Stop orders are particularly difficult to work when it comes to Nasdaq stocks. Stop orders on
the Nasdaq, first, are handled by few firms. Yamner & Co. Inc. does handle stops and does a
nice job with such client orders. We are one of the only firms in the country that will take
two-sided (stop & limit) orders at the same time.
Yet, when you are an investor using a stop and your stock happens to be one of those that is
trading wildly on the day, your execution results can and will differ greatly from your stop
price.
One particular execution came to mind this week, though, the recent volatility and illiquidity
in the Nasdaq seems to make this a more regular occurrence when dealing with one of the
Nasdaq's hard and fast movers.
A client had an order to sell QCOM at 166 ½ stop. The stock began trading in that range on Day
Y at 11:00:34. Wildly, the stock, already with a significant spread, tanked to 160 by
11:01:46. Quite simply, the stock sank nearly 7 points in 71 seconds. That was probably a
near record, which did not help the clients' cause. The client, with at 166 ½ stop was executed
at a price several points below the stop price. I know the trade because I worked it
personally. Quite simply, the client was disappointed. Yet there was simply nothing more that
could have been done. At the time, Instinet was selling several tremendous, 40,000+ shares,
and couple with the spread, no market maker wanted to take in stock. Who could blame them?
With the stock at 166 one minute and 160 less than 70 seconds later, would you take in stock?
Of course not.
The client, in our discussion, wondered why it took a minute, why it wasn't "auto-filled".
Quite simply, all market makers when something starts acting like that turn off any auto-fill
systems. That being know, in hunting around other systems and technologies, given that no one
in their right mind wanted to own stock during that down draft, to get a trade off in 71
seconds was, in my opinion, outperforming what the client might have gotten anywhere else.
Situations like this occur frequently in fast moving, volatile Nasdaq stocks. And while the
executions are not up to a perceived "Yamner" ideal, they are, in my opinion, excellent
executions, outperforming what someone may have received elsewhere.
The third area that clients often misunderstand is that involving shorting stocks. The
movement in the banking issues this week and the interest of shorts sellers offered a few
examples of hard work which nonetheless disappointed investors. On Weds., on speculation of
internet business models, many of these issues gapped significantly higher, providing an ideal
short situation, and immediately began sinking. For example, one issue that I had the
unpleasant experience of watching was FLBK. The stock open up many points higher than its
previous close. We had traded the stock for many clients, shorting it pre-open at various
prices and levels. Yet two clients that I can recall had market orders to sell at the open,
not pre-open. What occurred was probably one of worst scenarios I had ever seen in the Nasdaq
trading environment. Market Maker ABCD was bidding for the stock at 9:29:45 at 40 with an offer
of 39 ½.
This is called a crossed market which during the trading session is considered a violation with
few exceptions. The next bid was nearly 7/8 lower. Right at the bell, this market maker drops
his bid to just above the lower bid. This still maintains the crossed market condition. Here
is the result. You can not hit the bid because it was a down bid. You need to short on a down
bid or a 1/16 higher. Yet, you can not offer the stock on most ECNs because it would result
in a crossed market (though it is already a crossed market) thus the ECN systems automatically
reject such prices. SO you can't hit a bid, you cant represent an offer. This wouldn't be
what I would deem an open marketplace for this stock.
However you slice it, the result was that the stock dropped, crossed for nearly 3 points and
the client got nothing done on his order. One could imagine, without much thought, many
reasons and motivations for such action by the market makers. Yet the result is that the
client did not get the short off. There was disappointment, yet as the trader working the
order for these two clients, there was nothing that was done improperly on our end.
Yamner & Co., Inc. can not be all things to all people. We have no interest in doing this.
What we do offer is one of the highest quality brokerage firms in the industry, with some of
the best trading and execution technologies. All of that aside, the most important
characteristic of our firm is the personal relationships we strive to develop with our clients.
We work agency-only. Work don't make markets against our clients trades or take a principal
position in the transaction. We work for you, our clients.
Yet, our clients must understand that while you can come to expect great things from our firm,
while you can expect the industry's highest quality execution and brokerage services, there are
times, in various stocks, at various moments that will not go the way you nor we would have
liked them to have gone.
There are many firms out there, each offering differing services for different clients. In
addition to the multitude of online discount firms, there are a plethora of start-up direct
order entry firm. Each of these firms, like Yamner, has certain pluses and minuses. If a
client feels that the client might be better suited by technologies or services offered
elsewhere, the client should pursue those opportunities.
Yet, if you believe that we care for our clients, if you believe that we tell it like it is,
heed this one piece of advice that I mentioned above. No one, no firm, can be all things to
all people and no one has magic potion for getting you the perfect fill, all the time,
everytime. If they did, they wouldn't be offering it to the public. That said, go with the
firm you feel most comfortable with, where you feel that someone is working diligently and
honorable for your best interests, and be willing to understand the complexities and volatile
nature of the stock in which you choose to invest. Net, you will do better long term.
Hopefully though dialogue such as this, we can educate our customers about the marketplace and
the services we offer, providing a more enriched experience. If anyone ever has any questions
about a trade or the markets, please contact me at steve@yamner.com. I'd be happy to walk
through it with you in detail."
Also, decision point has an interesting discussion re: advance/decline shrinkage...do you subscribe?
any dates/locations for the "WE'VE ALL MADE MONEY SELLING FORE" party?
david
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