. Repetto worked at Lehman Brothers where he established the firm’sresearch coverage of the Internet Financial Services sector in May 1999.Prior to establishing this unit, he was part of the top ranked InstitutionalInvestor specialty finance team at Lehman, following a 10-year career atMobil Oil Corporation.Mr. Repetto holds a Masters of Business Administration Degree inFinance from The Wharton School of the University of Pennsylvania and aBachelor of Science Degree in General Engineering from the United StatesMilitary Academy. Mr. Repetto is a Chartered Financial Analyst (CFA) anda member of the New York Society of Security Analysts (NYSSA) and theAssociation for Investment Management and Research (AIMR).Michael Richter is Chief Executive Officer of Lime Brokerage LLC.Prior to joining Lime, Michael was President of Citicorp Securities Services,a NYSE member firm. His career includes senior financial and operationalmanagement roles at MarketXT, Citibank, Lehman Brothers, E.F. Hutton,American Express International Bank and Arthur Andersen. Michael has anundergraduate engineering degree from Rensselaer Polytechnic Institute anda master’s degree from MIT’s Sloan School of Management. He is also acertified public accountant.Sharon Salamon is currently the Director of Institutional Equities forProduct Management at Thomson Financial. Prior to her employment atThomson she was the Senior Sales and Marketing Executive at NeoNetSecurities, a firm focused on direct electronic access to the global equitymarkets. She also worked at Bloomberg providing market data to the
188
A Trading Desk’s View of Market Quality
financial community. Sharon is a graduate of New York University’sLeonard N. Stern School of Business.Richard Schenkman is Managing Partner of Elm Tree Group LLC, aprivate investment firm. He has served as CEO of Brut LLC and as ChiefOperating Officer and Executive Vice-President of Instinet Corporation. Heis a member of the National Organization of Investment Professionals(NOIP) and has served on senior industry policy committees. He holds a BAfrom the University of Buffalo.Robert Schwartz is Marvin M. Speiser Professor of Finance andUniversity Distinguished Professor in the Zicklin School of Business, BaruchCollege, CUNY. Before joining the Baruch faculty in 1997, he was Professorof Finance and Economics and Yamaichi Faculty Fellow at New YorkUniversity’s Leonard N. Stern School of Business, where he had been amember of the faculty since 1965. Professor Schwartz received his Ph.D. inEconomics from Columbia University. His research is in the area of financialeconomics, with a primary focus on the structure of securities markets. He haspublished numerous journal articles and seven books, including Equity Marketsin Action, Wiley & Sons, 2004 and Reshaping the Equity Markets: A Guide forthe 1990s, Harper Business, 1991 (reissued by Business One Irwin, 1993). Hehas served as a consultant to various market centers including the New YorkStock Exchange, the American Stock Exchange, Nasdaq, the London StockExchange, Instinet, the Arizona Stock Exchange, Deutsche Börse, and theBolsa Mexicana. From April 1983 to April 1988, he was an associate editor ofThe Journal of Finance, and he is currently an associate editor of the Review ofQuantitative Finance and Accounting, the Review of Pacific Basin FinancialMarkets and Policies, and The Journal of Entrepreneurial Finance & BusinessVentures, and is a member of the advisory board of International Finance. InDecember 1995, Professor Schwartz was named the first chairman of Nasdaq’sEconomic Advisory Board, and he served on the EAB until Spring 1999.Barry Small is Chief Executive Officer of Weeden & Company. Hegraduated with a Bachelors of Arts in economics from Colgate University in1976. After college Mr. Small played professional soccer for two years inthe North American Soccer League and the American Soccer League. In1986 he was one of the founding partners of Weeden & Co., an institutionalbroker dealer where he served as head trader until 1995 when he becamePresident and Chief Executive Officer. Mr. holds various securities licenses.George Sofianos joined Goldman Sachs in January 2001 and he isleading the firm’s trading costs and market structure research effort forequities. Prior to joining Goldman Sachs, he was Vice President and Headof Research at the New York Stock Exchange. In that capacity, he oversawthe development and maintenance of databases, the production of tradingstatistics, reports and research papers.
Participant Biographies
189
Before joining the NYSE, he worked at the Federal Reserve Bank ofNew York, in the Financial Studies department and at the Open MarketsDesk. Prior to that, he spent three years teaching economics and finance atthe Stern Graduate School of Business, New York University.Mr. Sofianos has published research on trading costs, the cross listingand trading of non-U.S. stocks, the NYSE specialist trading behavior, stockprice behavior on expirations, the impact of program trading on intradaystock price volatility, index arbitrage, margin requirements, and monetarypolicy. He holds B.Sc. and M.Sc. degrees from the London School ofEconomics and received his Ph.D. in economics from Harvard University.Holly Stark is Principal and Director of Trading at Kern CapitalManagement. Holly manages Kern Capital Management’s trading desk andis responsible for developing execution strategies designed to maximizereturns while minimizing transaction costs. Prior to joining Kern CapitalManagement in 2000, Holly was with Dalton, Greiner, Hartman, Maher &Co. (DGHM) for ten years where she was responsible for all tradingactivities. For eight years prior to DGHM, Holly was with Dillon, ReadCapital, Inc., the predecessor firm to DGHM. Through her current and pastparticipation on advisory committees at the NASD, New York StockExchange and The Investment Company Institute, Holly is actively involvedwith the changing structure of today’s capital markets. Holly earned herBachelor of Arts from Rutgers College in 1978.Joel Steinmetz is currently Senior Vice President for Equities and Headof Strategy for the Americas for Instinet Corporation. In his role as head ofthe U.S. Business Strategy Team, Mr. Steinmetz supports the ChiefOperating Officer and the members of the U.S. Equity Operating Committeein developing and implementing U.S. business strategy. He also worksclosely with the business segment leaders and regional business managers toformulate Instinet’s global trading product strategy.Mr. Steinmetz joined Instinet in 1990, and has acted as head of thearbitrage desk, the convertible arbitrage desk, the index arbitrage desk, andthe program desk. Previously, he was a member of the CommoditiesExchange, trading gold and silver contracts.Mr. Steinmetz has a B.A. in History from Queens College, the CityUniversity of New York and is a graduate of New York University LawSchool.Natan Tiefenbrun is responsible for institutional brokerage products &services at Instinet Corporation. Mr. Tiefenbrun oversees the evolution andexecution of the Company’s business strategy in areas including Client-SiteTrading, Client & Market Connectivity, Execution Management technology,Portfolio Trading, Rules-Based Trading, Transaction Cost Estimation &
190
A Trading Desk’s View of Market Quality
Measurement, Equity & Foreign-Exchange Crossing, and InternationalEquity Trading.Mr. Tiefenbrun joined Instinet in 1993 in London and relocated with hiswife to New York in March 2000. Mr. Tiefenbrun graduated from theUniversity of Edinburgh with a B.Sc. in Computing Science with honors.Bruce Turner joined CIBC World Markets, the U.S. investment-bankingsubsidiary of the Canadian Imperial Bank of Commerce (NYSE:BCM), as aManaging Director and Head of U.S. Equity Trading in April, 2002. Turneris responsible for all day-to-day U.S. equity trading floor activity. Turnerjoined CIBC World Markets from the Nasdaq Stock Market, where, asexecutive vice president of Transaction Services, he led the effort to developthe SuperMontage trading system.Before he joined Nasdaq in July of 2001, Turner spent nine years atSalomon Smith Barney. He was head of equity trading for Nasdaq stocksfrom 1998-2001. Prior to his service at Salomon Smith Barney, Turnerworked as a position trader for Oppenheimer – now CIBC World Markets.He also served on several Nasdaq advisory committees, including theQuality of Markets Committee, before joining Nasdaq.Turner holds a B.A. in Economics from Connecticut College andcurrently serves on the board of Directors for Governor Dummer Academy,the oldest preparatory school in the country.Laura Unger served as the seventy-eighth member of the Securities andExchange Commission, including Acting Chairman for the six months fromFebruary through August 2001. During her time as Acting Chairman, Ms.Unger tackled a number of complex and timely issues, including analystconflicts; the impact of Regulation Fair Disclosure on information flow; andunregulated internet portals.As Commissioner, Ms. Unger’s primary focus was technology. Shelooked at how the SEC could optimize the benefits of technology forinvestors, culminating in a groundbreaking 1999 report: ‘Online Brokerage:Keeping Apace of Cyberspace,’ earning her an award for ‘TechnologyPerson of the Year’ that year. She went on to implement many of thereport’s recommendations.After resigning her Commissioner seat, Ms. Unger joined CNBC, takingon the role of Regulatory Expert. As Regulatory Expert, she providedtelevised commentary about business, financial and market related issues.She currently has a portfolio of company directorships and consulting andspeaking engagements. Ms. Unger serves on several advisory boards,including the U.S. Institute Non Member Advisory Board, the SECHistorical Society Commissioner Advisory Board and the Wall StreetLawyer Advisory Board.
Participant Biographies
191
Before joining the Commission, Ms. Unger served as Securities Counselto the United States Senate Committee on Banking, Housing and UrbanAffairs. Prior to working on Capitol Hill, Ms. Unger was an attorney withthe SEC’s Enforcement Division. She received a B.A. in Rhetoric from theUniversity of California at Berkeley in 1983, and a J.D. from New York LawSchool in 1987.Wayne Wagner is a co-founder of Plexus Group, a Los Angeles based firmthat provides implementation evaluation and advisory services to U.S. andglobal money managers, brokerage firms and pension plan sponsors. Mr.Wagner and Plexus Group were chosen as the 1999 Consultant of the Year byPlan Sponsor Magazine. Investment News named him one of the ‘Power Elite25’for 2001.Plexus Group is an independent subsidiary of JPMorgan Investor ServicesCompany, a division of JPMorgan Chase.Mr. Wagner is author and editor of The Complete Guide to SecuritiesTransactions: Improving Performance and Reducing Costs, John Wiley &Sons, 1989. His most recent publishing effort is a popular investment bookwritten with friend Al Winnikoff entitled MILLIONAIRE: the simplestexplanation of how an index fund can turn your lunch money into a fortune;Renaissance Books, 2001.Mr. Wagner has written and spoken frequently on many trading andinvestment subjects. He has received two Graham and Dodd Awards from theFinancial Analysts Journal for excellence in financial writing. Mr. Wagnerserved as a Regent of the Financial Analysts Seminar and served on the AIMRBlue Ribbon Task Force on Soft Dollars and the AIMR Best Execution TaskForce. Mr. Wagner was a founding partner of Wilshire Associates and servedas Chief Investment Officer of Wilshire Asset Management. Earlier, Mr.Wagner participated in the design and operation of the first index funds atWells Fargo Bank.In an earlier century Mr. Wagner earned a M.S. in Statistics from StanfordUniversity and a B.B.A. in Management Science/Finance from the Universityof Wisconsin.Avner Wolf is Chairman of the Department of Economics and Finance,which is the largest department in the Zicklin School of Business at BaruchCollege. Zicklin is the largest business school in the U.S. and among thebest (top 20). Professor Wolf received his PH.D. from Columbia Universityin Finance. His research is in the derivative Financial Markets. He haspublished numerous papers in academic as well as in professional journalsand worked with Financial Institutions world wide on a variety of projectson derivatives. He has co-authored the book entitled The Handbook ofInterest Rate Risk Management, which is used intensively by professionals.
192
A Trading Desk’s View of Market Quality
Robert Wood is a Distinguished Professor of Finance at the University ofMemphis. Professor Wood previously taught at Penn State University for 14years and NYU for one year. His education includes a Ph.D. in Finance fromthe University of Pittsburgh, a Masters in Operations Research from StanfordUniversity, and a Bachelor in Economics from the University of Washington.He was a member of the Presidential Task Force on Market Mechanisms (TheBrady Commission) that studied the market crash in 1987, and a foundingmember of the NASD Economic Advisory Board. Professor Wood is thefounder and Executive Director of the Institute for the Study of SecurityMarkets, a nonprofit Educational Foundation that promotes securities marketsresearch by providing transactions data to academic institutions. He hasconsulted for various stock exchanges and investment firms around the world.Prior to becoming an academic, Professor Wood held various positions inindustry over a fifteen-year period.Steven Wunsch is a twenty-year veteran of Wall Street. He has writtenand spoken frequently on the structure and regulation of equities trading.During the 1990s, he was founder and president of the Arizona StockExchange, a company formed to design, build, market and operate anelectronic single price auction trading system. Previously, Mr. Wunschworked in the Financial Futures Department of Kidder, Peabody, where hewas a Vice President responsible for the Department’s institutional customerindex futures and equity trading activities. Prior to joining Kidder, Peabody,he was a floor trader and broker on the AMEX Commodities and New YorkFutures Exchanges. Mr. Wunsch received a B. A. in English Literature in1969 from Princeton University.
INDEXAccentuated intra-day volatilityparticipant attitude toward, 156–57Accentuated short-period price volatility,11–16, 21capturing, 163–64Accentuated volatilitycapturing, 162–64Krell, David, on, 60–61Schwartz, Robert, on, 60, 61Aggregators, 73Sofianos, George, on, 74Alternative display facility (ADF), 96n57,109residual markets and, 142n95American Century, 132Amex, 100Andersen, 144–45Aronson, Theodore, 124on AIMR, 124–25on best execution, 131–32biography of, 177on brokers, 136Association for Investment Management andResearch (AIMR), 118Aronson, Theodore, on, 124–25Best Execution Committee of, 118n76,124Madhavan, Ananth, on, 124, 134Tiefenbrun, Natan, on, 125–26Wagner, Wayne, on, 127–28Automatic execution, 69Turner, Bruce, on, 70Badla, 48Barclays Global Investors (BGI), 120Bennet, Paulbiography of, 177–78on market quality, 1–2Best executionAronson, Theodore, on, 131–32buyside trading and, 119Cheng, Minder, on, 129–30defining, 118Madhavan, Ananth, on, 117–18quantifying, 123
Tiefenbrun, Natan, on, 125–26, 133–34Wagner, Wayne, on, 133Bid-ask spreads, 16volatility and, 158Block tradingin Nasdaq/NYSE, 84Blue Chip stocksEuropean survey of, 29fBodine, George, 136–37biography of, 178Bogle, Jack, 131Brealey, Dick, 3–4,6Broker allocation, 121ideal, 122freal, 123fBroker scores, 120transaction costs in, 121–22value-weighted, 121Broking commissions, 4–5Brooks, Andrewbiography of, 178on liquidity, 55–56on market quality, 52, 78on openings, 57on order size, 56–57on portfolio management, 71on prices, 67, 74on random walks, 63on volume and volatility, 58Bull markets, 143–44Buyside trading, 22–30, 86, 132–33best execution and, 119fragmentation for, 25fsellside trading and, 131Stark, Holly, on, 65–66Call auctions, 67Turner, Bruce, on, 65Capitalization levelsStark, Holly, on, 64–65Cardello, Thomasbiography of, 178–79on decimalization, 45–46on Enron, 48on good and bad volatility, 42
194on ISE, 45on liquidity, 47on measuring volatility, 41, 42on reversion, 40on stationary volatility, 43on underlying securities, 46–47on volatility, 38Centralizationof Nasdaq, 96–97Cheng, Minderon best execution, 119–20, 129–30biography of, 179on commissions, 137on soft dollars, 134Cincinnati Stock Exchange, 98Closing call auctions, 21n10CommissionsCheng, Minder, on, 137Steinmetz, Joel, on, 86–87Competition, 91, 92–93, 96Unger, Laura, on, 146Congresscontributions of, 27fConsecutive short-period returns, 154Consolidation, 24f, 50n32in ECNs, 90fragmentation and, 93–94in options market, 49–50Contractual formsincentives and, 9Cormack, Michael, 89–90, 104biography of, 179on ECNs, 110on fragmentation, 95on retail investors, 105on SuperMontage, 111Correlationpositive and negative, 154n115Costs, 4
Daily volumeWagner, Wayne, on, 52Dalko, Viktoria, 75–76biography of, 180Dataon volatility, 164–65Davis, Paulbiography of, 180on Instinct, 87Decimalization, 98Cardello, Thomas, on, 45–46introduction of, 135n86Madoff, Mark, on, 55
IndexUnger, Laura, on, 148–49DemutualizationNasdaq and, 143n97NYSE and,141Deutsch Börse, 152open-to-close ratio of, 169–70second period of, 168trading hours of, 165volatility accentuation for, 17, 20f, 21Difficulty-adjusted measurements, 129Doyle, Thomas, 149Electronic communications networks(ECN), 81–82, 85, 106, 141consolidation in, 90Cormack, Michael, on, 110listed stocks on, 96n59Nasdaq and, 147Electronic market structures, 45Electronic trading platformsSchwartz, Robert, on, 59Enron, 144–45Cardello, Thomas, on, 48Equity markets, 130Equity portfolios, 4–5Euronext Paris, 152open-to-close ratio of, 169volatility accentuation for, 17, 19f, 21European market model, 32Execution costs, l0fFederspiel, Fredbiography of, 180on Liquidity Tracker, 66Filippa, Lucabiography of, 180–81on price discovery, 32Flemming, Mike, 31Fragmentation, 101bull market economies and, 141for buy-side traders, 25fconsolidation and, 93–94Cormack, Michael, on, 95Wood, Robert, on, 109Freund, William, 89biography, 181on fragmentation, 94–95on regulatory issues, 99–100Fund managementindustry of, in U.K., 9Goldman Sachs, 157Grasso, Dick, 140–41
IndexGresack, Mark, 66–67biography, 181–82on plan sponsors, 132–33Gupta, Sanjiv, 114biography, 182on listed markets, 102on market structure, 95–96,110on penny jumping phenomenon, 103on predatory pricing, 97on SuperMontage, 109on U.S. markets, 90–91Half-hour volatility, 20fHedge funds, 113Helsinki Stock Exchange, 32Historical volatilityimplied volatility v., 37fHOLDR products, 100Hong KongU.S. markets v., 48–49Iceberg of costs, 117–18Implied volatilityhistorical volatility v., 37fWolf, Avner, on, 38–39,41Implied volatility index, 36fIncentivescontractual forms and, 9output and, 8Indiamarket structure in, 48–49Information dissemination, 105–6Information leakage, 112InstinctDavis, Paul, on, 87defining, 81–82Institutional orderMadoff, Mark, on, 62–63Intermarket Trading System (ITS)NYSE and,119Intra-day price swingsmarket quality and, 150–51Intra-day volatility, 15, 20, 30capturing, 162–63Krell, David, on, 35–38limit orders and, 156–57patterns in, 167–70Investorssellside traders and, 25fISECardello, Thomas, on, 45gains of, 44n26Krell, David, on, 44
195Jote, Naribiography, 182–83on volatility, 47–48Killeen, Christopherbiography of, 183on institutional size liquidity, 56on market quality, 78on price dislocation, 58–59on reversion, 54on volatility, 53Kiting, 48, 49n31Krell, Davidon accentuated volatility, 60–61biography of, 183–84on decimal trading, 45on Hong Kong markets, 48–49on intra-day volatility, 35–38, 39–40on ISE, 44on market structure, 48–49on market volumes, 45on option traders, 43, 49–50Levitt, Arthur, 141–42LightSpeed, 73Limit ordersaccentuated volatility and, 156–57Madoff, Mark, on, 69–70Small, Barry, on, 68–69Liquidity, 22f, 23, 43, 54, 69, 70Brooks, Andrew, on, 55–56Cardello, Thomas, on, 47displayed v. undisclosed, 76institutional size, 56–57Wolf, Avner, on, 47Liquidity poolsSchwartz, Robert, on, 70Turner, Bruce, on, 64Liquidity rebates, 73n46Liquidity Tracker, 67, 76Federspiel, Fred, on, 66Liquidnet, 67, 98, 105, 112–13Listed markets, 96Gupta, Sanjiv, on, 102Redfearn, Brett, on, 101–2Schenkman, Richard, on, 97–98London Stock Exchange, 152open-to-close ratio of, 169second period of, 168trading hours of, 165volatility accentuation for, 17, 19f, 21Longer-period volatilitypatterns in, 170–71
196Low cost transaction systems, 7Madhavan, Ananthon AIMR, 124, 134on best execution, 117–18biography of, 184on transaction costs, 126–27Madoff, Markbiography of, 184on decimalization, 55on institutional order, 62–63on limit orders, 69–70on market quality, 77–78on retail order, 54Malitzis, John, 114biography of, 184–85on competition, 91on public quotes, 101on regulatory harmonization, 108–9Management fees, 5Market dataobtaining, 84Market failure, 7Market impact cost, 5, 119volatility and, 158Market impacts, 16Market makingfor sellside traders, 26fTurner, Bruce, on, 75–76Market process factorsof volatility, 158–62Market qualityBrooks, Andrew, on, 52definition of, 1intra-day price swings and, 150–51precursors to, 3–11Market structure, 173fixed commissions and, 141n92Gupta, Sanjiv, on, 95–96in India, 48–49McHugh, Sean, on, 145–46Merrin, Seth, on, 112–13Sofianos, George, on, 67–68, 76–77Turner, Bruce, on, 68volatility analysis and, 155–56McHugh, Seanon market structure, 145–46Merrin, Sethbiography, 185–86on information dissemination, 105–6on market structure, 112–13on one-sided markets, 64on portfolio management, 71
Indexon random walk theory, 107on regulatory changes, 114on SuperMontage, 91–92Microsoft, 85Mid cap stocksEuropean survey of, 29fMomentum trading, 16volatility and, 159–60Monahan, Russell, 110Myners, Paul, 3–4, 6, 7, 8Neuberger, Anthony, on, 135–36Wagner, Wayne, on, 137Nasdaq, 70, 83, 87–88, 92,101–2block trading in, 84centralization of, 96–97DAY of, 171demutualization and, 143n97ECNs and, 147exchange application for, 143Redfearn, Brett, on, 98, 147SuperMontage and, 146volatility accentuation for, 17, 18fNegative correlation, 154n115Net return, 7Neuberger, Anthonybiography of, 186on market quality precursors, 3–11on Myners Report, 135–36on underlying markets, 46New York Stock Exchange, 2, 53, 78, 92,106–7, 109–10block trading in, 84DAY of, 171demutualization and, 141ITS and, 119volatility accentuation for, 17, 18f, 21News factorvolatility and, 160No trade-through rules, 104–5Normalized price volatilities, 167fOne-sided markets, 63Merrin, Seth, on, 64Small, Barry, on, 63OpeningsBrooks, Andrew, on, 57Small, Barry, on, 59Opportunity costs, 119Option marketconsolidation in, 49–50underlying market and, 46Option traders
IndexKrell, David, on, 43Order flow, 30–31Outputincentives and, 8Ozenbas, Denizbiography of, 186on order flow, 30–31on volatility accentuation, 17–22Paulson Jr., Henry, 157Penny jumping phenomenon, 103Pitt, Harvey, 145Plan sponsorsGresack, Marc, on, 132–33Portfolio managementMerrin, Seth, on, 71Wagner, Wayne, on, 74Positive correlation, 154n115Predatory pricingGupta, Sanjiv, on, 97Price discovery, 16as dynamic process, 152efficiency of, 32Repetto, Robert, on, 33volatility and, 153, 158–59Price dislocationKilleen, Christopher, on, 58–59Price establishment, 162n130Price volatilityaccentuated short-period, 11–16Principal agent problem, 7QQQ volumes, 99Redfearm, Brett, on, 103–4Quality measures, 1–2Random walk, 62, 161Brooks, Andrew, on, 63Merrin, S