Our story as told by Donald E. Weeden
Enjoy a lens into the past through 13 documents from the desk of Donald Weeden. The pages are scans of actual Lectures, testimony and presentations given by Frank and Donald Weeden between 1966–1976 to regulators, industry trade groups, associations and business societies across the country. The discussion and debate surrounding market macro and micro structure, regulations and industry practice, while timely and relevant almost 50 years ago, are still germane to today’s discourse on market evolution. These time capsules prove and show that Weeden’s focus on market structure and serving our clients best interest is a real part of our partnership’s genetic makeup.
The Third Market – Past, Present and Future
Frank Weeden, November 1966
Commission Rate Structure
Donald Weeden, November 1968
Letter to the SEC
Donald Weeden, December 1969
Exchange Restrictions on Off-Board Trading
Weeden & Co., February 1970
Central Market Vs Single Market
Donald Weeden, November 1970
Keeping the Power Spread
Donald Weeden, March 1971
Competition Key to Market Structure
Donald Weeden, August 1971
Hearings on Market Structure before the SEC
Donald Weeden, October 1971
Remarks before the Houston Society of Financial Analysts
Donald Weeden, December 1971
The Securities Industry A Copernican View
Donald Weeden, May 1972
A Stock Trading System for the Future
Donald Weeden, December 1972
Investing in Reform and Gambling on Change
Donald Weeden, October 1973
Ideas and Power The Double Helix
Donald Weeden, February 1976
Wall Street Journal
While the industry has spent enormous amounts of time, money and resources in recent years, in a massive effort to analyze and prove their commitment to providing “best execution”, this goal is anything but new to us at Weeden. Our commitment to our clients and their best execution needs has always been a key pillar of our business model. Enjoy this copy of an advertisement that appeared in the Wall Street Journal on Tuesday June 20th, 1970. When written, we were a 48 year old start-up. Today, almost 50 years later, we don’t feel much different.
Wall Street Journal Ad
Tuesday, June 30, 1970
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, named the SS MARION CHILCOTT, along with his younger brother, Norman (1897-1970). Norman joined Blyth Witter shortly after and both left to establish Weeden & Co. in 1922.
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 & Co.
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.
In the 1930’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 clients 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.
During the sixties, Frank and Norman were still actively engaged in the business, along with Frank’s three youngest sons, Alan, Jack and me. 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, I became the public defender of the “third market” and leading advocate for competition as the best regulator to ensure the public obtaining “best price”. In my 1969 letter to the SEC,I referenced that with the new electronic technology “centralization of the market was now a communication concept and no longer a geographical one”. I recommended a ticker tape that consolidated trades from all markets including ours 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, I 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 I felt our 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 million shares in 1976 to 1.5 billion shares 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 for change it would entail. 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 me 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., followed by a larger issue the next year. The firm’s management was now in the hands of Frank’s three sons, each with our 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. 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, I found myself spending most of my 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. 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 it 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 Reg. NMS.
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.
On January 2, 1986, Weeden & Co. reopened its Institutional Equity Trading Department for business with $10,000,000 of capital, 28 personnel and offices in New York, Chicago and San Francisco. Employees risked their own capital to have “skin in the game” and some outside money was raised through a consortium including the Weyerhauser family based in St Paul, Minnesota.
From this new start, and benefitting from past experiences, the firm modernized its management style, further emphasized customer service and expanded the concept of employee ownership to where over 90% of the firm is owned by current employees.
Today, our full service, global equities & derivatives platform continues to leverage that unique blend of human knowledge paired with the most state of the art technology and analytics to provide the integrated trading capabilities and access to liquidity that our institutional clients demand.
Donald E Weeden