Trader Bulletin Interview with Richard Rosenblatt

Richard A. Rosenblatt is the Founder, President and Chief Executive Officer of Rosenblatt Securities Inc. No stranger to the securities industry, his thirty-four years of experience includes: twenty-nine years as a New York Stock Exchange member, six years as an NYSE Governor and four years as an NYSE Floor Official. Currently, Mr. Rosenblatt is an NYSE Executive Floor Official. His entrepreneurial spirit led him to originate the first automated order delivery system allowing non-member firms direct access to the NYSE through DOT as well as aid in the development and implementation of the NYSE's Broker Booth Support System (BBSS).

The Trader Bulletin: Thank you for taking the time to speak with us today. To begin with, what is the minimum size order that your firm typically handles and how has that changed in the past few years?

Richard Rosenblatt: We've never had a minimum order size. Originally the reason for that was because we wanted to be a part of smaller young firms and hopefully help them to become large firms. We never took the position that you had to be large before you qualified to be one of our clients. Today, we still don't have a minimum order size, but there is an additional reason. The nature of automated business has changed. We were the first firm to enable a non-NYSE member to access the DOT system directly. Today, we are still very active in providing that service and many clients utilize this service to rebalance quantitative portfolios for their systems, or trade in an arbitrage capacity of some sort. At the end of the day they may do a very significant amount of volume, but they may do it in relatively small orders. As a pure agent, we have no firm trading account and we never shop orders. We simply service investors. The last thing I want to do is tell one of my clients what their investment philosophy should be.

The Trader Bulletin: How can a customer get a better price with a floor broker than by entering their orders via the DOT system?

Richard Rosenblatt: The DOT system is wonderful for accessing exposed bids and offers very, very quickly. It also has some disadvantages in that respect, but we don't really have time to get into that. The primary benefit is the speed of accessing exposed bids and offers. DOT is wonderful. What most institutional clients want, however, is to execute their orders in some sort of joint venture with their agent. We have clients that will delegate their entire order to us and we'll simply work it as we see fit. We also have clients that want to be intensely involved with the execution process and pretty much call the shots themselves. The vast majority of our orders for institutional clients are somewhere between those extremes. We get a constant flow of information from the trading crowd. The decisions being made about the execution of orders are the results of the dialogue between our broker and our client and this dialogue is changing constantly. This process doesn't lend itself to a static environment, or to simply accessing the market electronically. It's a very fluid event. It's still a people business. Accessing the kind of size that an institution wants and providing the liquidity they need, usually requires a dialogue between agents representing both sides of that transaction.

The Trader Bulletin: So, is crowd information the real benefit you provide, and can computers replicate that?

Richard Rosenblatt: No. Computers are wonderful at accessing data, but trading stocks is not a science. It's an art form. The decisions that have to be made are subjective decisions based on objective data. The speed and the subtly that we bring to that process cannot currently be replaced by computers. People are essential to the process working efficiently. When I am doing a perfect job, I am taking my client and their investment wishes and putting them in a trading crowd with whatever experience and expertise I have. That requires an in-depth understanding of my client's wishes, constant trading of information, and the ability to react to an ever-changing set of variables almost instantly. Right now, computers can't do that, but they are wonderful in a static environment. Very often an automated order delivery system like DOT is a valuable tool in implementing some investment strategies. Usually, however, it is not an appropriate environment to satisfy a traditional institutional client's needs.

The Trader Bulletin: Suppose a customer wants to buy 10,000 shares of a $30 stock that trades 100,000 shares a day. What things will you consider when filling that order?

Richard Rosenblatt: Some things never change, the cost of an execution, other than commissions, is really made up of two pieces: Market impact, which is how much you have to move the price of the stock in order to buy or sell your intended quantity; and opportunity costs. This refers to the cost of not executing the order. In the attempt to minimize market impact, if you are too passive, the trade may not get done, or may not get done in the quantity that your client requires. It all depends on why your client has decided to buy or sell a stock. It gets back to the joint venture aspect of the execution. It also gets back to the job of an agent. That is, to know your customer very, very well. I'll execute the same order for one client very differently from that of another client. Some of my clients have a very short time frame for executing an order and they expect to experience a higher market impact, if necessary, to get that position.

The Trader Bulletin: Do you typically leave orders with a specialist?

Richard Rosenblatt: Usually I will stand in the crowd myself or leave just a part of the order with the specialist. There are also cases when I would leave an entire order, but that is rare. It depends on the specialist, how much I respect the particular specialist's ability, and how well I think the specialist understands my needs. It also depends on the way the stock trades and whether or not the specialist, under the rule constraints that apply, can actually accomplish my client's goals. The reason that people are still so key to the process is that there are not set answers to these questions. There are an infinite number of variables depending on what the market is doing, the personality of the stock and the specific interest of the client.

The Trader Bulletin: Can you explain the specialists CAP system and how this system affects the orders you leave with the specialist?

Richard Rosenblatt: Specialists are prohibited by the SEC from having any discretion in handling an agent's order. The SEC does, however, permit an agent to give a specialist an order. These orders have become known as "CAP" orders. They allow the specialist to reflect the agents' instructions in a somewhat flexible way. There are a myriad of rules that apply to what I can tell a specialist I'd like him to do. It's a very useful tool for me. Once I come into a trading crowd and assess the market, I know how I will want to handle the order. The specialist doesn't have the same latitude that I would have. Yet, if my interest in executing an order is within the latitude the specialist does have, then the CAP order enables me to leave that order with him and have it executed in a way that I would like it executed for my client. That being said, there is no way to give a specialist an order that will enable him to execute that order with the same flexibility that I have. You can never delegate the responsibility for the execution. The fact that I give a specialist a CAP order does not mean that I can walk away from the stock and just say, "Well; he is going to deal with it." It does mean that I can walk away from the stock and still be represented in a way that I choose to be represented. I can go other places and come back assured that I am staying on top of the market. It also puts my clerk in a wonderful position to help me monitor that order. Every time 100 shares are executed it automatically comes back to my clerk and we are aware of it. It is ever changing. That is what makes it fun and exciting.

The Trader Bulletin: Has OpenBook affected your business in any way?

Richard Rosenblatt: Open Book is great. What OpenBook does is help me as an agent, especially when I'm in a trading crowd. Our service is often very intense. I may be on an open line to my clerk; my clerk might be on line with our client; and my clerk may also be viewing the OpenBook in that stock. The specialist will be telling me of any significant bids or offers as they come in, but the specialist is also busy because he is handling a lot of other stocks. My clerk, who is focused on this one stock, has only one job. That is, to keep my customer happy and give me the information I need to do my best work. He is constantly telling me what is coming into the book and what is going out of the book. That, combined with knowing what other brokers in the crowd are doing, gives me the clearest possible picture. It helps me make decisions in the trading crowd as to how passive or aggressive to be at any moment.

The Trader Bulletin: Have you found that there is a greater propensity for market participants to "penny" large displayed orders? If so, is there anything you can do for your customers to mitigate this practice?

Richard Rosenblatt: Pennying is actually a valuable tool that I can use on behalf of my clients. Again, I am a pure agent and have always considered it my responsibility to never spend more of my client's money than I have to. If I am competing with somebody, I will compete in a way that benefits my client the most. If that client has given me latitude that exceeds the latitude of my competitors, and I believe that it's appropriate to take a more aggressive stance, I will spend as little money as possible to accomplish my client's goal. If I can accomplish that goal and only spend a penny more than my competitors, that is exactly what I am going to do. Now, on the other side of the coin, the way to protect my clients from that is through dialog, knowing my client, and having a constant flow of information. Although I might be trying to buy stock at $20, if I know that my client would pay $20.50 if they absolutely had to, and my client gives me that discretion in the trading crowd, I now can protect my client from being "pennied". I can compete with anyone, at any price. If it's another broker that I am competing with, they have a disincentive to penny me because they're going to buy the same amount of stock no matter what they pay. I'm not going to allow them, simply by paying more, to take my client out of the picture. So now they've got an incentive to keep the price as low as possible. If they're only going to be able to buy 1/3 of what trades or 1/2 of what trades, they don't want to pay more than they have to. So it becomes part of a negotiation. Let's say we are trading. I am a buyer, and my competitor is a buyer, and these small sell orders keep coming in. "Pennying" is not going to make sense then because they're not going to buy any more stock. In fact, if I am bidding $20 and 500 shares comes in for sale, and they pay $20.01, well, then next time I am going to pay $20.02. I am not going to allow myself to be competed with at a disadvantage if I have the latitude to compete aggressively. That gives the person I am competing with a disincentive to push the price higher, and that protects my client from being "pennied". Although, it doesn't always work that way. Somebody could offer and I may choose not to buy that offer. If another buyer comes in and chooses to buy it, so be it. But, I very seldom will make that choice for a penny. If my decision is whether to pay 20 cents or 21 cents, and I have the latitude, I will very seldom take a risk that someone else will pay 21 cents while I am sitting there trying to buy at 20. Then again sometimes, I will. Maybe there is so much liquidity that I think I can buy it at 20 cents, 19 cents, and 18 cents. Then I take the risk of being pennied.

The Trader Bulletin: Often big orders are not fully displayed in OpenBook. Does this impact OpenBook's effectiveness?

Richard Rosenblatt: It depends. It's like defining "efficiency". Efficiency only makes sense in terms of the function that you're trying to accomplish. Quotes never are an indication of liquidity. They never have been. The only quotes that are indications of liquidity are retail quotes that must be displayed in their entirety. Institutional quotes are tactical tools. They are designed to attract liquidity, not to advertise it. So if I have 100,000 shares of stock to buy, I am going to bid for exactly the amount, at exactly the price, that I feel will attract sellers. I am not going to advertise to sellers what my client has given me to do. So OpenBook reflects exactly what it should reflect, held orders--usually retail orders. Sometimes there is decent size because there's an accumulation of retail orders. No quote system--and I have been in business many years--has ever been efficient, because it forces people to display their size. That's not efficient. "Efficient" is allowing an investor to buy or sell at the most advantageous price, and that's the agents' job. So when an agent bids or offers they are doing so tactically to advantage their clients. They're not simply advertising liquidity to the world.

The Trader Bulletin: When a customer gives Rosenblatt Securities an order and that order is left with the specialist, does at least a portion of that order need to be reflected in OpenBook?

Richard Rosenblatt: No. If I leave an order with a specialist as a held order, which I do sometimes, I might have 100,000 shares to buy. If I want to buy 5000 at 20 cents I simply give the specialist 5000 shares to buy at 20 cents. That order will be reflected in OpenBook. The fact that I have another 95,000 shares to buy after that will not be reflected, however, because I choose not to reflect it. Also, if I give the specialist a CAP order there are certain absolutes that must be followed. It's called "electing on volume." Under the rules of a CAP order, every time a stock trades under certain conditions part of that CAP order becomes a held order, and that would be reflected in OpenBook. The part of that order that I have given the specialist and said, "This is how I want that handled. If A happens then do B; if B happens than do C," would not be reflected in OpenBook because those contingencies haven't occurred. The last thing I want to do is advertise what I would hope to see happen to potential competitors before I've had the opportunity to actually do it. So CAP orders allow me to instruct the specialist on certain aspects of what will go into OpenBook. I cannot restrict other aspects. That is called being "elected on volume," and those orders must be entered into the book and displayed on OpenBook.

The Trader Bulletin: Do you think the NYSE's new Liquidity Quote will affect your business?

Richard Rosenblatt: It will definitely affect my business. I am hoping in a very positive way. The way the rules read currently, for me to access the size bid or offer I must first trade with the smaller bid or offer? or the best bid or offer available. What that does is get a better price for my client versus simply trading above the market. I'll always have the opportunity to do that, even with Liquidity Quote, but [the current method] forces me to tip my hand that I am going to pay a higher price before I'm actually able, under the rules, to pay that higher price. Liquidity Quote will enable the following: Suppose 500 shares are offered at 8 cents and 50,000 shares are offered at 10 cents. I will be able, if I so choose, to simply buy the 50,000 at 10 cents. Whereas if I wanted to do that without Liquidity Quote, I would first have to buy the small order at the price where it is offered. In that case, if there were other buyers in the crowd then they might join me in aggressively bidding for that offer. Liquidity Quote is currently in testing and has really not come into wide use yet, so I can't tell you tactically how I will use it. I love things that are new though because it means I have tactical opportunities that I didn't have previously.

The Trader Bulletin: Okay, well that about wraps it up Richard. This was truly a very informative discussion. Thanks again for your time. We really appreciate it.

Richard Rosenblatt: You're very welcome.

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