Cantor Fitzgerald LP is expanding into equity wholesaling, the business of executing orders off exchanges primarily for firms catering to individual investors.
The operation will begin next month, Jarred Kessler confirmed through Sandra Lee, a spokeswoman. Kessler is global head of equities at Cantor. Dow Jones Newswires reported earlier today that Cantor, Goldman Sachs Group Inc. (GS) and Credit Suisse Group AG (CSGN) all may enter the business.
American financial services firms are looking for new lines of business after U.S. lawmakers passed the Volcker rule last year as part of the Dodd-Frank Act to restrict banks from making bets with shareholder money. Equity wholesaling is dominated by firms including Knight Capital Group Inc. (KCG), UBS AG (UBSN), Citadel LLC and Citigroup Inc. (C), whose market-making units execute trades within their own walls.
“It doesn’t seem like a growth business,” Adam Sussman, head of research at New York-based Tabb Group LLC, said in a phone interview. “If it’s not a growth business, it’s a displacement strategy, which means they think they’re going to take business away from someone else.”
Michael Duvally, a spokesman for Goldman Sachs, and Credit Suisse’s Karen Laureano-Rikardsen declined to comment.
Shawn Matthews, the chief executive officer of the Cantor Fitzgerald & Co. subsidiary, said in a Nov. 30 interview with Bloomberg News that Cantor plans to add at least 200 employees next year in a companywide expansion. The company boosted headcount in areas including credit trading, leveraged loans and fixed-income sales by more than 200 this year.
About 10 percent of U.S. equities volume comes from individual traders, according to Joseph Mecane, co-head of U.S. listings and cash execution at NYSE Euronext. About 30 percent of equities trading takes place over-the-counter, with those transactions based on prices established on exchanges, according to data compiled by Bats Global Markets Inc.
Discount and other brokers that cater to individual investors often turn to wholesalers for orders that can be traded at the market’s prevailing price. TD Ameritrade Holding Corp. (AMTD) sent 74 percent of its market orders in NYSE-listed stocks to Citadel and 21 percent to UBS in the third quarter. Charles Schwab Corp. (SCHW) sent 99 percent to UBS in the second quarter.
Market makers in the wholesaling business typically give slightly better prices than are available publicly to individual investors, and pay retail brokers for sending them. The orders are attractive to market makers because the senders, unlike professional traders sending buy and sell requests to exchanges, aren’t expected to know more about short-term price movements than the wholesaler.
Firms engaging in wholesaling “make a little bit of a spread between the price they improve the client at and their exit price,” Sussman said. The spread refers to the difference between the price at which the firm buys shares and sells them.
NYSE Euronext and Nasdaq OMX Group Inc., the biggest operators of U.S. stock markets, have argued that the increase in orders traded away from exchanges erodes the ability of buyers and sellers to interact and yield prices that are deemed reliable. The New York Stock Exchange and NYSE Amex proposed a pilot program in October to attract some of the orders wholesalers don’t trade with. Their aim is to diversify the participants using the venues to attract more volume.
“We are looking to build out our sales and trading businesses in both debt and equity,” Cantor’s Matthews said in the Nov. 30 phone interview about the company’s overall expansion. “There are a lot of qualified people looking for an alternative to the traditional financial services model that has made many banks act more like massive hedge funds.”
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