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NYSE Technology Threatens Survival of Floor Traders

Technological changes and weak markets threaten floor traders, but a veteran broker says a human touch still adds value.

Each weekday just before 8:00 a.m., Vincent Farina arrives at his office on the tenth floor of 20 Broad Street in lower Manhattan, upstairs from the New York Stock Exchange. He pours himself a cup of coffee, reads his e-mail and checks the overnight markets on his Bloomberg Terminal. Then at about 9:00 a.m., half an hour before the opening bell, Farina goes down to his firm’s station on the NYSE trading floor and greets the six other members of his trading crew.

For most of his 40-plus-year career, Farina would spend the bulk of the trading session on the floor, personally executing his clients’ most sensitive orders. In recent years, though, as the Big Board and its customers have shifted more and more of their orders to faster, electronic trading systems, Farina has been heading back upstairs earlier and earlier. On a recent Friday morning, with no orders to handle, he was back at his desk by 10:45 a.m.

“Slow today?” asked Farina’s sole upstairs employee, daughter Danielle, who oversees operations and administration.

“Slow would be nice,” sighed a frustrated Farina, glancing up at a television tuned to CNBC.

Farina has seen plenty of ups and downs since he first stepped onto the exchange floor as a clerk in the mid-1960s. From the ending of fixed commissions on May Day in 1975 to the October 1987 stock market crash to the tech stock bubble of the late ’90s to the attacks of September 11, 2001, the 61-year-old broker has lived and traded through tumultuous events at the heart of the U.S. financial system. But technology now threatens to do what bear markets, recessions and terrorists failed to do in the past: end a way of life for Farina and his dwindling cohort of floor traders.

“The buy side wanted fast, cheap execution,” Farina tells Institutional Investor. “Well, they got it. Now everything is algorithms, crossing networks, dark pools. Humans have been almost completely replaced by machines. I keep waiting for the market to realize the upside of having a human involved in the process. For a throwback like me, that’s my only hope.”

These days fewer and fewer traders share that hope. As recently as December 2005, the floor was home to 1,244 equity members — specialists, now called “designated market makers,” and brokers — and 2,087 clerks, according to the exchange. Today there are 442 equity members and 627 clerks. Farina and Associates is one of the last of the NYSE’s independent floor brokerage houses, firms once known as “$2 brokers” because of the fixed per-trade commission they used to charge. The number of independents has fallen to fewer than a dozen from 50 or more two decades ago, Farina estimates.

The floor is a victim of technology. Electronic exchanges such as longtime rival Nasdaq Stock Market and recent upstart BATS Exchange have siphoned off much of the activity from the floor by creating ultrafast trading networks. The NYSE responded to the pressure in 2006 by acquiring an electronic exchange of its own, Archipelago Holdings; the following year it snapped up Euronext, the multinational European exchange that had itself gone largely electronic, to create holding company NYSE Euronext. Now, of the roughly 6.5 billion shares of U.S.-listed stocks that change hands each day, the NYSE handles only about a third of the total, according to industry estimates. Even for NYSE-listed stocks, the exchange has a market share of just 42 percent, according to its most recent statistics. A substantial percentage of the volume that does make it to the floor, moreover, is executed via a single click on NYSE Arca without the need for two human beings — a floor broker and a specialist — to interact. Floor brokers accounted for just 5 percent of overall volume in April, exchange data show.

Determined to keep swimming against the tide, Farina makes sure that his floor team is equipped with state-of-the-art systems for carrying out smarter and faster executions. They use an expensive, powerful order management system called Mixit that gives them access to practically every liquidity venue on the planet.

“I’m not averse to technology — I just think this trend toward the machines has gone too far,” Farina says. “People who fought for these changes used to say that the guys on the floor picked them off. Do they really think the guys upstairs running those dark pools aren’t picking them off? People want transparency — you get that here on the floor, not in a dark pool.”

Growing up in the Bensonhurst section of Brooklyn, then largely a working-class Jewish and Italian neighborhood, Farina knew exactly how he wanted to spend his days: as a longshoreman, like his father, Vincenzo. A first-generation Italian immigrant, Vincenzo worked brutal hours unloading freight cargo on Piers 57 and 59 on the West Side of Manhattan. “He always worked Monday through Saturday, and sometimes Sunday,” Farina recalls. “There were even times when he worked for several days on the docks without leaving — eight hours on, four hours off — until a ship was emptied.”

Grueling as that life was, the younger Farina wanted in. “When I graduated high school in 1964, I asked my dad when I could start down on the docks, and he told me in his broken English, ‘No way, son, you gonna work in an office!’ ”

So Farina, at 17, found a summer job as an office boy in the Rockefeller Center offices of brokerage firm Bache & Co. He transcribed handwritten tickets into a ledger, fetched coffee — “basically anything that needed doing,” as he puts it. After a year’s active duty in the U.S. Army Reserves, Farina came back to New York and to his old job at Bache. He also worked nights as a bouncer at a nightclub in Queens, where he met his future wife, Lorraine. “I checked her ID, and the rest is history,” he says.

One of Bache’s office managers assigned Farina to the floor of the NYSE, where the action was. Bob White, who at the time oversaw Bache’s floor operation, helped him make the transition, and eventually, Farina landed a job as a clerk at now-defunct brokerage firm Lockwood Peck. Later he moved to E.H. Stern & Co., which would become Lasker, Stone & Stern.

Lasker Stone comprised three units: a commission-based brokerage, a specialist group and a proprietary arbitrage desk. “When I started clerking on the floor, we sent handwritten trading slips upstairs using pneumatic tubes,” Farina says. “Later we used big computer punch cards — that was considered modern.” In December 1974, Farina became a licensed floor broker, which allowed him to trade directly in the market.

Farina’s supervisor was a no-nonsense, widely admired trader named Bobby Oscher. Nicknamed “Bobby O,” Oscher was Lasker Stone’s head of execution and worked under Bernard (Bunny) Lasker, an arbitrage legend and a former chairman of the NYSE. (Lasker was the “bunny” invoked in Martin Siegel’s infamous Boesky-era quip, “Your bunny has a good nose.”)

Oscher, a fellow Brooklynite, became Farina’s mentor and role model. Together they handled orders for many of the biggest, best-known Wall Street traders during the heyday of merger arbitrage.

“If, at the start of the day, I wanted to sell 95,600 shares by the end of a session, there were two guys on that floor — and I mean only two guys — I would trust with the order,” notes Warren Choset, a pioneer on Merrill Lynch & Co.’s risk arbitrage desk in the mid- to late 1970s who currently works at New York hedge fund firm Havens Advisors. “Bobby and Vinny. No one else. And believe me, for Vinny to be mentioned in the same breath as Bobby O — both in terms of market skills and integrity — that’s saying a lot.”

In 1980, at the age of 53, Oscher was diagnosed with pancreatic cancer. He went into the hospital and never left. His sudden passing was a tough loss for the firm, and for Farina. “He taught me the business,” he says. “Not just how to trade, but how clients, their needs, always came first.”

By the end of the fast and furious ’80s, Bunny Lasker was looking to slow down and trade just his own capital. Lasker Stone split in 1989, with Donald Stone taking the specialist piece and Farina taking the brokerage business, injecting his own capital and forming Farina and Associates with ten employees in January 1990.

He enjoyed some great years in the ensuing decade (“I made enough to put two daughters through college,” he says) but continued to face obstacles, most formidably the introduction of decimal pricing, a major market structure change that was ordered by the Securities and Exchange Commission in the late ’90s and put into effect at the NYSE in the summer of 2001. The new rule “killed us,” insists Farina. “A hundred price points, as opposed to eighths or sixteenths, made it harder for guys like me to make money and easier for the machines, so we lost large orders.”

Increased volume slightly offset the drastic narrowing of spreads, and Farina maintained a small but loyal client base. But business, he says, has never been the same. Still, whereas some of his contemporaries have taken to watching DVDs during business hours, Farina soldiers on, staying as positive as he can. “You have to try to do your best,” he explains. “I’ve watched a lot of guys throw in the towel. I’ve chosen to stick it out. We have long-standing clients who rely on us.”

Farina realizes that if he is to stay in business, he and his team have to find a way to convince traders and portfolio managers that certain large or time-sensitive orders are better handled by human traders.

“Just because something is faster and cheaper doesn’t mean it’s better,” notes daughter Danielle, a Villanova University graduate who clerked several years for specialist firms Van der Moolen Holding and Spear, Leeds & Kellogg before joining the family business last year. (Vincent’s other daughter, Nicole, doesn’t work there, though her husband, Billy Sachs, does, as a floor broker.) She adds, “We give our traders access to all the same technological tools as anybody upstairs, but ultimately, what we bring to the table is superior service, the comfort and security of knowing an order is in good hands and that it’s going to get done.”

The human touch can come in handy at other times also. “Machines malfunction,” Vincent Farina likes to point out. Now and then his phone rings because somebody’s automated system has gone down. “Not too many guys can figure out an arb-spread trade with pen and pad,” he notes.

“Everybody talks about customer service and best execution, but Vin takes it personally,” says Christopher Crotty, 40, a veteran floor trader of convertible securities who joined Farina five years ago from a competitor. The NYSE member firms, broker-dealers and small to midsize money managers that deal with the firm do so because “they trust us,” he asserts. “In some ways the Street hasn’t changed after all these years. Guys still want to know exactly who they’re trading with.”

Guys like Choset. During one recent session the arbitrageur had a 35,000-share order he considered time-sensitive because of possible “headline risk,” as he puts it. “I called down to the floor to make sure that Vin was in the crowd and that he would personally handle the order,” he recalls.

Farina sprang into action. He thought about using an algorithm but instead decided to break the order into small lots and trade it directly on the floor. Within half an hour the deal was done.

“I’m not averse to the modern way of trading,” Farina says. “But at heart, you can say, I’m old school.”

It’s an open question whether floor traders can continue to survive, considering the onward march of technology. But Farina is determined to carry on.

“This is the kind of market where the people who know what they are doing — who have been through tough times — can add value,” he says. “I love this business. It got into my blood when I was young, and it’s still there.”

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