Media Room

Thriving Through Change: A Q&A With Rosenblatt's Gawronski

Wednesday, April 24, 2013

TRADERS MAGAZINE

GREG BRESIGER

Agency-only floor broker Rosenblatt Securities is used to change, says president and chief operating officer Joe Gawronski.

The company was founded by floor broker Dick Rosenblatt in 1979, as a $2 broker, handling overflow business for other brokers.

But the small, independent firm, often considered a boutique broker, has had to make and remake itself several times over the past three decades.

The New York-based firm has on occasion taken gambles, Gawronski said, which in the short term seemed crazy, such as moving into options in a down market. Gawronski says Rosenblatt was right to be interested in options. But by the time it was finally ready to offer them, the business was slowing down. Still, he believes it will be a good move in the long term because having another asset class option is important for clients.

Still, not all of its makeover gambles have worked, Gawronski concedes. Once, for instance, the company moved into trading European stocks, but hired a trader in New York to handle it. That didn't work, he explains, because European clients weren't given all the services other firms were offering, most especially bundling research with executions.

Nevertheless, Rosenblatt, unlike many other floor brokers, is not only still alive but thriving, Gawronski says. And the firm, which once lived and died on NYSE trading volumes, has survived because it has embraced change and, in many cases, prospered from it.

For instance, the firm now offers market structure analysis and advice, with a specialty in the operations of dark pools; execution analytics and consulting, along with research designed to generate alpha in the areas of exchanges, TMT, energy and macro strategies, among other services, according to Gawronski.

"It's been quite an evolution. We went from being a firm that focused solely on floor execution to offering a much more diverse menu of execution services to more customer segments-an evolution that continues to this day with the addition of options trading in 2012," Gawronski said.

Why the changes?

Gawronski says clients have become "more self-directed in their trading approach with the adoption of algorithms." So, he adds, Rosenblatt began "providing tools around the trade that add value to clients even when we are not executing for them." These included market structure advice and transaction cost and predictive analytics that leverage the latest developments in big data and visualization. And now, Gawronski says, "We're providing unique content to help clients with alpha generation."

An example of the latter, he says, is the recent deal with Wedge Partners (see separate story). Rosenblatt will be providing research from Wedge on telecommunications, media and technology firms, to its own institutional clients. For Wedge's clients, Rosenblatt will provide a full suite of trade execution services.

Another change is the way Rosenblatt gets paid. Gawronski notes that the majority of revenues now come through commissions, whether that's execution-only business or clients paying through trading for our tools and content. At the same time, the percentage of non-commission income has grown over the past five years from virtually nothing to 15 percent of revenues last year.

Notably, Rosenblatt began life working with the sellside, handling work for a variety of brokers. But it had to remake itself when it was less than a decade old. The October 1987 stock market crash led to doldrums that forced it to look for a new customer base from the buyside, although will not disclose the names of these clients.

"In addition to beginning to serve the buyside on the floor at that time, we became the very first firm to embrace automated trading and offer DMA (direct market access) to the buyside and started an upstairs desk too," Gawronski said. He notes that after the '87 crash, Rosenblatt also began trading Nasdaq stocks and did so as an agent, unique at the time.

Gawronski, who came on board in the fall of 2002 after stints as a securities attorney at Sullivan & Cromwell, in the equities division at Salomon Smith Barney and as COO of a block crossing start-up called Linx (which was a Dick Rosenblatt brainchild and where they met), is a Rosenblatt lifer. He is one of three senior primary partners who hold equity in Rosenblatt Securities, along with Dick Rosenblatt and Scott Burrill, a 17-year buyside veteran who heads the firm's analytics and technology group.

In a recent question-and-answer session with Traders Magazine, Gawronski charted the ups and downs of a small trading firm that has survived for 34 years in a feral trading environment, an environment in which many of his former colleagues and competitors were felled by perils of future shock. 

TM: First, tell us how Rosenblatt Securities began.
Gawronski: The firm started in 1979, but Dick Rosenblatt, or "Richie" in floor-speak, began on the floor in 1969.
   
TM: And how did he start?
Gawronski: To continue in the colorful but disappearing language of the floor, he began as an "odd lot" clerk, progressed to working "pork chop wires" and eventually he obtained a small-business loan to buy a seat and start his own firm.
  
TM: And so...
Gawronski: Rosenblatt started as the classic $2 brokerage business, where the big firms on the sellside had overflow business and would use these independent floor brokers when they were busy.
   
TM: Trading volume fed the business, but, after 1987, things changed, right?
Gawronski: Yes, the crash in '87 led to a very tough '88, as the classic $2 brokerage business really dried up.
  
TM: So Rosenblatt Securities had to be remade?
Gawronski: The sellside just didn't have the business to give us. So Dick transitioned it to a "public" business-that is, interacting directly with the buyside, and not just dealing with the sellside. That said, as a relationship firm, we still count a couple of dozen broker-dealers among our customers, many of them from that era.
   
TM: So even before you faced the electronic challenges of the last decade, requiring that the firm be changed, you're saying Rosenblatt Securities went through a similar makeover back in the 1980s?
Gawronski: Yes, that's right. And that's what this business is about. And if you talk to Dick, he'll tell you the business is all about constantly evolving and reinventing yourself.
  
TM: And you're saying those firms that can't reinvent themselves run the risk of irrelevance?
Gawronski: Without a doubt. I don't want to be overly tough on floor brokerage, but that business model was a one-trick pony. But we would always look to protect ourselves.
  
TM: Because back in the 1980s you didn't know when volume could be bad?
Gawronski: Any given month back then-or for that matter today-could be slow. Or if the New York Stock Exchange lost its franchise, which it eventually did, we knew we could be in trouble.
  
TM: And when did Rosenblatt first see the need for reinvention?
Gawronski: After the crash of 1987 it became crystal clear. And since then it has been a continual adaptation process. We have been constantly trying new things.
  
TM: And one of those new things after the crash was that Rosenblatt thought it was a good time to start trading Nasdaq stocks?
Gawronski: Yes, he had a client who liked the way he traded the New York stocks for him, so he wanted him to trade Nasdaq stocks as well, also as an agent, which wasn't how the Nasdaq names were traded back then. So Dick started an upstairs trading desk to trade Nasdaq stocks, which grew into a program trading desk later.
  
TM: An agency-only approach has been an emphasis of your brokerage?
Gawronski: Yes, we are pure agents. And I think one of the things we've tried to do is redefine what agency brokerage means when you don't have the order in your hand.
  
TM: How?
Gawronski: What agency used to mean was that you had an order and you weren't trading for your own account, so people understood you were fighting for that order without a conflict of interest. Over time, as more and more people used algorithms and things were getting more automated, our question was how could we still perform our agency function even when we don't have an order.
  
TM: Which means?
Gawronski:  How could we help the client? How could we be aggressive at pursuing whatever it is they were trying to achieve as an agent on their behalf? So, with a lot of these other things, whether it's transaction-cost analysis, market structure and trading strategy advice, or research, it means trying to service the customer in the same independent, pure agency way.
  
TM: But sometimes this reinvention process championed by the firm's founder fails.
Gawronski: I once told an internal critic of one of our new areas, "Look, we're confident that some of the things we start are ultimately going to fail, but we're supremely confident that if we don't try new things, our firm will definitely fail. So you have to try new things."
  
TM: Such as trading Nasdaq stocks?
Gawronski: We were one of the first firms to trade them as an agent.
  
TM: Later that looked like a good move...
Gawronski: Right. Later on, after decimalization, virtually everyone went from trading Nasdaq as a principal and earning a spread to trading Nasdaq as an agent and earning a commission. But we were doing that since the late 1980s, along with a handful of other firms.
  
TM: Sometimes, this reinvention can and does seem counterproductive.
Gawronski: Yes, Dick Rosenblatt in 1988 did a joint venture with a technology company to give a buyside quant firm, one that intended to trade programs with us, electronic access to the NYSE. DOT had been restricted to member firms, and through this new product Rosenblatt became the first firm to offer direct market access to buyside firms. Now that, to some people at the time, was sheer lunacy. Why would you offer your customer a tool that allows them bypass your floor broker and program trading services?

TM: Why?
Gawronski: If you think that's the way of the future, if you think this is the way things will ultimately happen, you want to be the guy sponsoring that access, you want to be the guy constantly giving the client new tools.
  
TM: Even if it is at your expense...
Gawronski: Yes. You deepen the relationship with the client and let them know you're looking out for their best interests. It's a long-term partnership-a marathon, not a sprint, to use the popular analogy.
  
TM: But that doesn't always work out. What do you do when the client isn't satisfied with some aspect of your services-say, your pricing isn't the lowest?
Gawronski: You say to the client, "Look, this isn't our last best idea. This idea we're sharing with you now, you can take it and go to another broker and implement it. You can probably have someone else do it for you cheaper." But if that's the client's attitude, that's not the client for us. We're trying to build a partnership. We're trying to come up with creative ideas. We're busting our butts to work for a client-the high-touch approach, the bespoke work we do, is very different from what they often experience in this era of cost-cutting and lower service levels. Yeah, we also have to be cost-competitive, but we also expect the client is going to value the service and is waiting for the next creative idea.
  
TM: Because trading strategies come and go.
Gawronski: Exactly. Since the 1987 crash, we learned that you have to be constantly evolving. So that is our mantra.
   
TM: That's your way of surviving?
Gawronski: Because you're competing with these bulge bracket firms that offer IPO calendar, offer capital commitment, offer research in every conceivable category, and are multi-asset class and multi-geography, as a little guy it is very easy to get crushed, unless you actually take advantage of the nimbleness and flexibility your small size affords you.
  
TM: Can you give me an example of how you can help a client relationship even though it might mean less business in the short term...
Gawronski: Let's look at a lot of houses on Wall Street and the way they usually work. When they get an order from someone, they tend to call a good portion of the rest of the Street about it. Why? Not because they're serving that order, really expecting to find the natural-cross rates are tiny in this era of algo trading-but mainly because they are trying to ingratiate themselves with the accounts they are calling to show that flow. They risk a lot of information leakage in doing so. Our attitude on this is that the order we have is sacred. The only way we are going to even think of making a call is if it is extremely targeted and we think we have a very high likelihood of success in that call-and of course have the client's permission. So we make very limited calls, almost none compared to the rest of the Street.
  
TM: So how will you execute?
Gawronski: We believe there is plenty of liquidity on the exchanges and there's plenty of liquidity in the dark pools. The potential for information leakage is rarely worth seeking out the contra block.
  
TM: So you're saying this is an example of losing some business in the short run, but improving the client relationship?
Gawronski: Yes, when you do that you lose out on commissions. You don't get the commission from the other side of the trade in the limited instances that even happens, and you lose out on potential business from other accounts.
  
TM: You're saying that some brokerages are making money by leaking every order that they get?
Gawronski: Yes, I can tell you that when you call a big asset manager a hundred times in a day with merchandise, even if they say no a hundred times, you'll probably get a working order. So you'll ingratiate yourself using the client's information and that's just not how we do it.
  
TM: However, in embracing change, you concede that Rosenblatt also failed at times. Can you give me some examples?
   A: We've had failures, for sure.
   
TM: And so...
Gawronski: One that is a painful one for me is from when I first joined the firm some 10 years ago. I recognized even at that time that the perception of U.S. equities execution was moving towards a commodity, and I wanted to diversify into two areas: options and international trading. When we finally got into options in 2012, it was the first down year in options volume in 10 years-so much for my timing. I was right in wanting to get into options trading 10 years earlier, trying to get into that growth curve, but I failed to implement it.
   
TM: And in international trading, you still have an office in Dublin.
Gawronski: We do still have a presence in Europe. For instance, we have an annual conference in London every March and publish a monthly dark pool report there. But the idea I had was to actually trade European stocks. And we set up to trade them about five years ago and it just didn't work.
  
TM: What went wrong?
Gawronski: We had a guy based in New York. And I think the attitude of the U.K. and Continental accounts was, "Why do I need a New York guy to execute European stocks?" It was also true there, even more there than here, that research is bundled with execution and we didn't have a research offering in that area. And the bulk of the accounts were looking for the research. 
  
TM: And so...
Gawronski: Overall that failed and we moved on. We'll keep our eyes open for another opportunity there, but the formula will have to be different.
  
TM: Still, in options you thought there was, and possibly is, a great potential area.
Gawronski: Yes, options are relatively new for us, but we've studied the market structure and opportunity for years and we think there is still a tailwind in terms of institutional adoption. Portfolio managers can express views with options and get leverage that you just can't in straight equities. So I think you will continue to see adoption of options, which will help us.
  
TM: And the benefit of this to Rosenblatt will be?
Gawronski: For us, it is in building a platform with people we trust and doing it consistent with our philosophy as a pure agent. And I think that there is a decent chance that we could add more sales traders to that platform and that could give us the scale that you need. And we are right now expanding the research to support the effort.
   
TM: The need for scale is another way of finding new business relationships, you believe. An example of that would be you recent deal to act as an outsourced trading desk for research boutique Wedge Partners.
Gawronski: Yes, if you look at Wedge, it is producing great research. It's innovative-it's not what the rest of the Street is doing. They are making clients money.
  
TM: So why the agreement with Rosenblatt Securities to provide them with execution services?
Gawronski: The short answer is, we're great at execution and running a broker-dealer, they're great at research, so their clients get best of breed. Eliminating the duplication of infrastructure is another reason the deal made sense for us and for them. To be a B-D you have to pay for compliance, connectivity, a back office, a bunch of traders, technology and so on-you're paying a king's ransom just to get a seat at the table as a broker-dealer today. Plus, there is limited client overlap between the two firms, so there is the opportunity to cross-sell one another's product. 
  
TM: So you have to try new things, but you believe, in "embracing the future," as you say, there are still limits?
Gawronski: Yes, I'll add a philosophical caveat to that: You have to be very careful and measured in your approach.
  
TM: Which means?
Gawronski: You can't always dive in with both feet because you could easily bankrupt yourself with the wrong move. We've been in business for nearly 35 years for a reason. Yes, we reinvent ourselves all the time, but we also make sure our bets are small enough that if they fail they are not crippling. And also that we are tackling areas that are niches or areas that the bulge bracket is not serving well-the Wee Willie Keeler "Hit 'em where they ain't" philosophy.
  
TM: You believe that some independents have moved too fast with disastrous results?
Gawronski: For sure. Some built out all these fundamental research sectors, spending a lot of money on research analysts, but frankly have taken a "me too" product approach, competing head-on with bulge bracket offerings that had a lot more sales muscle behind them as well as ancillary services. It's a prerequisite for our content offerings that they have a unique angle and have deep expertise behind them. They have to be different and top-notch. Otherwise, it's not worth playing.
   
TM: This is a peril that independents faced in 2008 when there were lots of financial professionals available as bulge bracket firms were shedding talent and some independents hired them?
Gawronski: Typically, they would come to you and say something like, "I worked at Merrill for 20 years and am responsible for $15 million in business a year." But they never did it at a little independent execution-only broker. You need to distinguish between the seat and the guy.
   
TM: So to work successfully at your kind of firm requires a special kind of salesman/sales trader?
Gawronski: Unless your relationships are uncannily tight, it's easy for a $15 million guy to go to zero at an agency-only broker. We made some mistakes for sure in hiring some people who thought that they had a book of business and we thought that, too. You live and you learn.

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