The End of an Era: Harvey Houtkin

July 28, 2008

It was with sadness that I learned recently that my former client Harvey Houtkin died this Saturday.

Up until the 1990s, Wall Street's old guard was entrenched at the New York Stock Exchange and NASDAQ. Under the banner of market stability, those market mainstays extracted a quarter of a point here and a half of a point there. They kept the spread based upon an archaic formula of 1/16ths, 1/8ths, 1/4s, and similar fractions. Further, the brokerage industry was a chokepoint through which all orders intended for execution had to pass, and the tribute exacted on such order flow was a price-fixed commission system. Of course, in 1987 when the stock market crashed, all those vaunted guardians of market stability just let the phones ring on their market making desks. Hey, you didn't have to fill any order that you didn't hear over the phone.

Harvey stood in the tidewaters of Wall Street and saw the ebb and flow. He saw an outdated industry that needed to be computerized and reoriented to interface with the Internet, and he helped create the technological infrastructure that paved the way for ECNs and direct access trading. Without the combativeness of Harvey Houtkin, it is unlikely that Professors Christie and Schultz would have been motivated to publish their historic market critique in 1995. And without that landmark paper, it is doubtful that the United States Department of Justice's Antitrust case against NASDAQ's top 24 market makers or the contemporaneous Securities and Exchange Commission's 21(a) Report citing NASD/NASDAQ for improper market activity and regulatory conduct would have materialized.

Yes, Harvey relished the term "SOES Bandit"--- much to my chagrin as his outside counsel from 1995 to 2000. In those days, defending Harvey was tantamount to taking on the entire regulatory world. A corrupt and corrupted regulatory system came crashing down upon the fledgling day-trading and ECN community. As now documented in the landmark In the Matter of the Appeal of Domestic Securities , Houtkin and his businesses were singled out by biased regulators, but we climbed into the ring, went toe to toe, and won! The Antitrust Division's case, the historic $1 billion dollar class action settlement, and the SEC's damning 21(a) Report were more icing on the cake.

Shortly after I represented Harvey before the Senate during testimony in connection with the day-trading investigation, Harvey and I had an acrimonious parting in 2000. Those were difficult times for the SOES and ECN communities--the Tech Wreck was crashing down upon the Street and lurid disclosures of abuses by many day-trading firms filled the news. Before you jump the gun and roll your eyes, let me finish my point here -- I'm not about to pretend that the SOES community was motivated solely by charitable instincts. There were some bad folks in the biz and too many small-fry investors lost their life savings.

Nonetheless, the hated ECNs showed staying power and soon grew in stature to take on both the NYSE and NASD--and now ARCA and Instinet are critical components of their once larger foes. And the SOES Bandits? Well, perhaps they were of a time, as the saying goes. Most of the old firms collapsed or were subsumed into larger competitors. Today, scratch beneath the surface of a Charles Schwab or an E*Trade and you'll likely find the remnant of a SOES Bandit.

No, Harvey was never the easiest guy to get along with. Like many visionaries, he brooked little debate. However, such are the catalysts of our society. Not always lovable. Not always modest. However, they strike the flint that sets off the sparks that create new businesses and wealth. True, sometimes those fires can get out of control and in the case of the old SOES firms, a number of investors who should never have been day trading got burnt. Still, that all could have and should have been addressed by impartial regulators and creative regulation. Instead, much like the crisis sweeping our markets today, we were saddled with inept regulators and tired regulation. The more things change, the more they remain the same.

To his credit, Harvey Houtkin refashioned Wall Street. You may not like the new look. Perhaps you preferred the stability of fixed commission, wider spreads, and less public access to the markets. Like what you will. Dislike what you will. Nonetheless, once Harvey Houtkin cast his gaze on Wall Street, it was forever changed, and, in my opinion, the good by-products were faster executions, lower costs, and more transparency. Not a bad legacy.

Nice job, Harvey.