"All that matters is movement," says Burke. His biggest day in the market resulted in a $50,000 gain when the Dow plummeted 250 points, then recovered. "One day I lost $10,000. I didn't want the market to close. I was mad at myself. I was up pacing that night. I came in at 6 the next morning, even though the market didn't open until 8:30."
NASDAQ in theory belongs to the public, but trading on it has always passed through a select group of market makers who sit in front of what are known as Level II screens. The screens display all the market makers' prices on a given stock, as well as recent trades of it. Hence, they provide clues to future price movements.
Chris Block contends that the vast majority of retail brokers have never heard of a Level II screen, much less seen one. Moreover, he adds, "if a broker said he wanted a Level II screen on his desk, his firm would laugh at him." The firm's market makers, usually the big studs in the shop, would never allow it. He says this hoarding of vital pricing information arises from the single fact that at the large brokerage houses, the trading desk accounts for as much as 40% of a firm's operating profit. Says Block: "They don't make money on retail brokerage. That's just a distribution system for the stock they're hawking."
JUST TRADING
The SOES bandits at Block Trading are too busy making money to notice that they're restructuring an industry and eating into its old guard's profits.
"The other traders call my style 'radical,' " says Stephanie Clark with a laugh, describing her own--so far successful--approach. She favors high-flying high-tech stocks that carry wider spreads and produce wider swings in price. Clark has an equity stake of $300,000, borrowed at 15% from a friend, against which she might be carrying 12 open positions worth $1 million or more at any one time. In September, the month I visited Block Trading, Clark netted $25,000 after commissions and paid $3,000 in interest. October started off with a bang. In the first two days she made $14,000; the next three, she lost $12,500. "The market got real jiggy on me," she recalls. "I'm looking for a trend one way or the other. That's how you make money." When the trend's not there she takes a day off or even a short vacation to Cozumel. After the three-day losing streak in early October, she went shopping. Her next day back she netted $9,000. She made $60,000 for the month.
At 2 p.m. on the day of my visit Clark has already made 80 "round-trips"--80,000 shares bought and sold. She's up $6,000. She'd like to go to the bathroom, but she can't get "flat," or close out her positions. "Why is Intel going down?...Nice, PAIR just downticked," says Clark, transfixed by the screen. "Hamquist is really a buyer, but he acts like a seller. I'm not going to fall for that."
In the last hour she has made three-quarters of a point and a "stick and three-quarters" (one and three-quarters) by twice shorting PairGain Technologies, a stock that has gyrated between 74 and 79 since the opening. Now she thinks it will strengthen toward the close, so she'll go long.
"You've got to stay flexible and have a sense of humor about this," she says. It's also a good idea not to let details muddy the process. To Clark a stock is nothing more than a four-letter symbol describing its own peculiar trajectory across her screen. PairGain Technologies is one of her favorite stocks because it jumps around so much, but to Clark it's simply "PAIR." "Are they a big supplier of copper wire?" she asks. "I don't know."
STOCK COPS?
In the Wall Street hierarchy SOES bandits rank somewhere between outcast and untouchable. That amuses Burke and Block. "What we're doing for the first time is exposing the corruption and collusion that's been going on in the markets for years," says Burke. "We're not the bandits. They're the bandits."
Last August the Securities and Exchange Commission filed a lengthy report that confirmed what many people had suspected. It stated that there was, effectively, collusion and price-fixing by market makers, with a consequent cost to the public of billions of dollars. In a consent decree the NASD, while not admitting guilt, agreed to spend $100 million to police itself.
Burke and Block find such a move laughable. They say that the NASD could spend nothing and clean up the markets simply by allowing the SOES bandits to continue to trade without restriction. "We're the stock cops," says Block. "We're the ones who keep the market makers honest." Block Trading offers a check on professional market makers' abuses by letting the common folk in. "We allow our customers to come right in," says Block. "Go to Goldman Sachs and ask them to let you into their trading room. It'll never happen. This has been a monopoly situation, and all of a sudden the business has been invaded by guys like us."
THE OLD GUARD
Getting a comment from established brokerages about SOES is akin to inquiring about an errant family member who, if ignored, might be forgotten. Our phone calls to Merrill Lynch, Smith Barney, and Morgan Stanley seeking comment about SOES all went unreturned.
But Meyer Berman, who heads his own New York and Florida-based investment firm, M. A. Berman, will fill your ear. "This is the biggest story of the financial world in the 20th century," says Berman. He says that SOES-created volatility has lured hordes of unsophisticated investors into the market and pushed stock prices up to unsustainable levels. When the bubble bursts, Berman predicts, SOES traders will then drive the market down through massive short selling. That drop will dovetail with the market makers' backing away from holding stock (and thus maintaining the fair and orderly market with which they are charged) because "they've been SOES'ed to death." Adds Berman: "They [the SOES bandits] say they're for the little people, but they have really screwed the little people. SOES is the ruination of the market makers, who are now afraid to hold stock."
