Weeden: The Story
In 1913, Frank Weeden (1893-1984) entered the securities business in San Francisco as a municipal bond salesman for a newly formed partnership by the name of Blyth-Witter. Frank was the eldest son of a sea captain and grew up aboard a three masted sailing ship (I have a good photo of that sailing ship, named the SS MARION CHILCOTT), along with his younger brother, Norman (1897-1970). Frank claims he never finished high school. His time with Blyth Witter was interrupted twice before he and Norman left to establish Weeden & Co. in 1922. The first leave of absence occurred with the closing of the NYSE in 1914 when he left to work in the lumber camps of Northern California where the pay was better. The second occurred when he joined the US Navy as an Ensign in 1917.
Weeden & Co. started with a loan of $25,000 from Captain Weeden and slowly built a business dealing in California based municipal bonds, becoming known by its acronym DISCOB (Dealers in Seasoned California Bonds). In 1928 the firm raised $300,000 from friends and customers and began publishing its Balance Sheet and Earnings Statement, making it one of the first in the industry to do so. A 1933 tombstone for a new issue of Golden Gate Bridge and Highway District Bonds attested to Weeden’s standing in the industry when it listed the four underwriters: Blyth & Co., Inc., Bankamerica Company, Dean Witter & Co. and Weeden (another good photo of that tombstone).
Despite the Stock Market Crash in 1929, Weeden did well and reported profits every year except 1937. Fortunately, it had stuck to its knitting as a bond dealer serving institutional accounts where all transactions were strictly “delivery against payment”. By 1937, Weeden had opened offices in Los Angeles, New York and Chicago.
Sometime in the 30’s, Weeden, sensing a growing demand from its institutional accounts, began making net markets in the preferred shares of the larger California utility companies and eventually extended this activity to the common stocks of utility companies located all over the country. Many of these shares were listed on the NYSE.
Volume, personnel and profits decreased dramatically during the war years and Weeden’s revenues did not return to levels experienced in 1929-32 until 1952.
Finally, in 1949, Weeden extended its market making to include a small group of industrial common stocks popular with the institutional investors who were beginning to emphasize equities in their trust and pension fund portfolios. Weeden would quote a bid and offer at a net price to its customer which would save him some or all of the commission required when the transaction was done on an exchange. In a Special Study for the SEC published in 1963, this activity was dubbed “The Third Market” to distinguish it from transactions done on exchanges and those done in “over-the-counter” stocks. Weeden not only made markets in size for the institutional investor but also in smaller amounts for the over 4000 non-member brokers active throughout the country. According to the SEC Special Report, Weeden dominated this market, accounting for over 50% of the volume.
This activity became increasingly important to the overall business of Weeden, and for a time exceeded the revenues and profits from its more traditional business of trading and underwriting municipal bonds. During the sixties, Frank and Norman were still actively engaged in the business, along with Frank’s three youngest sons, Alan, Jack and Don. By the late sixties, the cost advantages of doing business in listed stocks “off board” at prices net of commissions, began to severely encroach on the near monopoly enjoyed by the NYSE. This elicited an extensive effort by the NYSE to eliminate the “Third Market” by means of government regulation and even legislative action.
With support from the rest of the family, Don Weeden became the public defender of the “third market” and leading advocate for competition as the best regulator to insure the public obtaining “best price”. He also pointed out in a 1969 letter to the SEC that with the new electronic technology “centralization of the market was now a communication concept and no longer a geographical one”. He also recommended a ticker tape that consolidated trades from all markets including his as well as a composite quotation system that showed in what market the public could find the best bid or offer. In testimony before the SEC, Don explained that the public would benefit if the minimum commission rule of the exchanges was eliminated and admitted that it would have an adverse effect on Weeden’s business if this were to happen. At the same time he felt his firm would do all right because the volume of business done by the public would increase dramatically with the reduction in commission charges.
By the early seventies, the volume of “Third Market” business exceeded 10% of NYSE volume and forced the exchange to begin modifying its strict commission structure to provide discounts on large transactions. Finally, in 1975, the Exchange Act Amendments brought about a full elimination of fixed commissions and the beginning of an era that took average daily volume of 16,000,000 in 1976 to 1,500,000,000 twenty years later.
Some members of the family were always more interested in the “processing” of the trade than the trade itself and focused the firm on being more efficient, accurate and timely in handling a transaction than what was being done by its competition. This interest led the firm to understanding and utilizing the new computer based and electronic communications technology. Weeden became an early user of Quotron, Autex and Instinet and supported these innovative systems financially as well. At the time, Most of Wall Street, as well as the Buy Side were reticent about embracing too much innovation because of the uncertainties and need to change it entailed. Weeden saw the new technology as a way of improving profit margins and ultimately reducing the costs of trading to the public. A testimonial to the firm’s aggressiveness in using the new technology came in 1998 when the Chicago Stock Exchange presented Don with a Lifetime Achievement Award as “The Father of Electronic Trading”.
In 1970, Weeden sold shares to the public through an underwriting led by Bache and Co., (I have a reprint of the tombstone) followed by a larger issue the next year. The firm’s management was now in the hands of Frank’s three sons, each with his own area of recognized expertise - municipal bonds, operations and equities. With greatly increased capital and a growing reputation as a significant player in equity trading and municipal bond underwriting, the firm began to expand its dealer activity into other types of securities and to add additional offices throughout the United States, including one in London, England. Continuing growth required additional management, and caused Weeden, in 1975, to reach outside the family for the first time for someone to run the firm. Concurrently, Don found himself spending most of his time in Washington, DC, arguing the case for the “Third Market” before the SEC and Congress.
As early as 1971, the Third Market was forcing a breakdown of the rigid separation between members of exchanges and non-members. As an example, Weeden’s willingness to make markets similar to a specialist, was sought after by many of the regional stock exchanges. In the case of the Cincinnati Stock Exchange, Weeden went even further by developing an automated trading system that allowed for multiple market makers to display their markets in competition with one another on the same screen. By 1976 the system was enabling the Cincinnati SE to interact electronically with other regional exchanges. This innovation was dubbed the WHAM System (acronym for The Weeden Holding Automated Market) and in 1979 was recognized by the SEC as one of two experiments for centralizing information from all exchanges into a National Market System. The automatic execution capability of the WHAM system anticipated by almost 30 years, the electronic interconnection of all exchanges required by the SEC in 2007 called the Reg. NMS System.
In early 1978 the firm ran into a capital problem that was caused by a number of things including over expansion, higher than normal inventories, technology glitches, and a rapidly developing inflation causing both the stock and bond markets to decline sharply in late 1977. After struggling through 1978, with a Weeden again as CEO, the firm chose to merge with the highly reputable Boston based brokerage firm, Moseley, Hallgarten and Estabrook.
The ensuing period of Weeden’s history was not a particularly happy one, but it allowed the members of Weeden’s remaining equity trading department ample time for some useful soul searching and rethinking of the previous model, a time in which they planned a more effective strategy for going forward. By 1985, after six years “in the penalty box”, a small cadre of traders, salesmen and management talent was ready and anxious to become independent.
The senior members of the department, including Don Weeden, Barry Small and Tim McDonald, began discussions with Moseley and by late 1985 had negotiated a friendly departure that included the purchase of the Weeden name and corporate structure.
On January 2, 1986, Weeden & Co. reopened for business with $10,000,000, 28 personnel and offices in New York, Chicago and San Francisco. $3,500,000 represented commitments from the employees while the remainder came from non-employees, the Weyerhaeuser family based in St. Paul., Minnesota, being the largest investor.
From the start, Barry Small began to assume managerial responsibilities for integrating the trading, sales and operations and by 1994 was formally given overall direction of the firm as senior managing partner and CEO. Barry had come to the “old” Weeden in 1976 as a “walk on” trainee after a two year experience playing professional soccer following graduation from Colgate University. Barry’s interests, ethical standards and leadership capabilities fit neatly into the challenges facing Weeden as it reestablished itself as an independent firm.
Under Barry’s leadership the firm continued its long standing culture of openness, informality and egalitarianism that came out of the Weeden family’s California background. Benefitting from past experiences, the firm modernized its management style, further emphasized customer service and expanded the concept of employee ownership to where over 80% of the firm is owned internally with all employees participating.
Weeden believes that it can best serve its institutional clients through a creative use of the latest technology in tandem with a cadre of highly trained salesmen, traders and operations professionals. With an 86 year history of good service behind us, and 180 employees with an ownership interest, the firm is committed to maintaining the highest standards of service to our institutional investors in the years ahead of us.