Bad Boys of Capitalism

The story of how a start-up is making money for itself and its clients through NASDAQ's Small-Order Execution System.

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Their aim: move fast, make money, have fun. Who knew they would threaten a whole industry in the process?

Block Trading's office on the third floor of a Houston shopping mall exudes the dimly lit quiet of a pool hall, suggesting an activity that is as purposeful as it is questionable. Twenty-eight customers sit in high-backed leather chairs, staring at the dance and flicker of numbers across computer screens. Stephanie Clark is one of them. Picking at a piece of cold pizza and sipping a can of Mr. Pibb, Clark speaks in code as she eats lunch and keeps an eye fixed on the screen. "Load to buy PAIR at 71 and a half...cancel the short on Cascade...offer Robotics at 63 and 11 teenies." Across the desk, a broker enters her rapid-fire orders to buy and sell stock in 1,000-share blocks.

Thin, blond, and getting richer by the minute, Clark only 18 months ago was a 28-year-old secretary at Oppenheimer & Co. in Houston, where she grew tired of watching men make money while she answered the phones. Now, thanks to the alternative created by Block Trading cofounders Chris Block and Jeff Burke, she's a "SOES bandit"--SOES (pronounced sews) standing for the Small-Order Execution System, which gives individual investors both direct access to stock prices and near-instantaneous executions on NASDAQ, the computerized system that trades over-the-counter stocks. "Bandit" is the epithet conferred by the established market makers who create and support markets in stocks, and who want to keep individual traders out--off their turf and away from their profits.

But it's too late for that. For Clark and the other bandits who've been given a place at the market's table by Block Trading, this has become their day job. They arrive daily before the market opens, sit in their regular seats, and trade stocks from bell to bell. On a good day a SOES trader might make a grand or two. On a bad day he or she will give it back. The only sure thing is this: no matter how much their enemies huff and puff, the bandits are here to stay.

KAMIKAZE CAPITALISM
In the past three years Block and Burke, by building a company that wires SOES bandits directly into the stock market, have conspired to turn the securities industry on its ear. And the establishment has set off an alarm. The Stephanie Clarks of the world, say the market makers, are unsophisticated speculators who will undermine the securities markets and may even cause them to collapse. Less often mentioned is the reality that the SOES bandits have cut into market makers' profits and have helped produce fairer pricing for the average investor.

Block and Burke couldn't care less what others think. They're too busy having fun and making money. SOES has caused such a dustup, says Block, because "some of the wealthiest people in the world are getting screwed, and they don't like that." And NASDAQ is just the first front of a looming war. It's only a matter of time, Block argues, before the New York Stock Exchange's proprietary information, still moved by people wielding pencils and paper, leaks into cyberspace, where it will become public property. "They'll turn the exchange into a museum," he vows. Meanwhile, Block Trading's revenues continue to soar--they've gone from $1 million in 1995 to $18 million in 1996--and the firm, now with 13 offices in five states, is busy opening new locations at the pace of one a month, as the two founders happily gather the spoils.

Block and Burke nod approvingly as, by noon on this day, star customer Clark makes a flurry of 120 commission-generating trades and carves up the market makers for another $3,000 in gains. But it isn't just Clark's swelling bank account, or even the clash between the SOES bandits and the securities-industry old guard, that makes Block Trading's story worth watching. Block's deeper significance is that it is doing what countless start-ups before it have done in numerous other businesses: flouting the rules, threatening the status quo, and altering forever how an industry works. Chris Block and Jeff Burke could fail long before turning their firm into the Wal-Mart, Southwest Airlines, or Dell Computer of stock trading. But by then it wouldn't matter. They already will have sown their own brand of market-changing chaos. Theirs is the story of how change really happens in the new economy.

COMRADES
The corporate offices of Block Trading, near the apex of the atrium in Houston's tony Galleria Mall, convey a baronial splendor that hardly suggests a company that has sprung up overnight and may not last more than another season or two.

Chris Block and Jeff Burke themselves, both 30, look like the Felix and Oscar of SOES trading. Block is beefy and voluble, given to rapid-fire thoughts and big ideas. He's quick to reach for his hard pack of Marlboro Lights and Cricket lighter. He wears suspenders imprinted with the currencies of the world.

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