Bypassing the Brokers

By RICHARD BEHAR

Gary Ciuffetelli once scraped out a living in a machine shop, but now he's getting ready to "ride a wave," as they say at All-Tech Investment Group in Suffern, New York. Dressed in shorts and a T shirt, the 33-year-old trader stares at a computer screen linked to the National Association of Securities Dealers Automated Quotation System (NASDAQ), the world's second largest stock market after the New York Stock Exchange. Sensing that Lotus stock is starting to climb, Ciuffetelli tells an All-Tech clerk to buy 1,000 shares. The clerk presses a few buttons on his keyboard, and the deal is automatically made for $32 a share. Minutes later, the ex-machinist sells. "Hallelujah, I made an eighth of a point!" shouts Ciuffetelli. By day's end, 58 trades later and $900 richer, he is ready to return to his family's trailer home.

For Ciuffetelli and his fellow small traders, who hope to parlay tiny price ! fluctuations into handsome profits, All-Tech and dozens of similar firms have become Wall Street's version of off-track betting parlors. Visitors to the Suffern office find plumbers, bartenders, retirees and out-of-work lawyers crammed elbow to elbow in nine rooms filled with clerks, computer screens and high hopes. The screens show the various "bid" and "asked" prices offered by dozens of marketmakers -- firms such as Goldman Sachs and Morgan Stanley that deal in specific stocks.

While the quoted prices appear to move in concert, a few sometimes lag behind, creating brief price differentials that clients spot and pounce on. Customers who correctly predict the direction of a stock can reap $250 (less commissions) for each quarter-point gain on a 1,000-share bet. But "riding a wave" is not so easy: a stock can blip upward, enticing a small trader to buy it, and then come tumbling down. "Oh my God!" cries a fortysomething beautician as she loses $250 in a split-second transaction involving Genzyme, a biotechnology firm. "This has been the longest trade of my life."

At a time when stockbrokers garner about as much trust as politicians and journalists, All-Tech's do-it-yourself trading generates an astonishing total of nearly 2% of the national over-the-counter market's $5.2 billion of daily volume. Founded in 1988, the firm now includes thriving branches in Dallas and Minneapolis. This week All-Tech is opening its first New York City office. "We're turning people away every day because we don't have enough terminals," boasts chief executive Harvey Houtkin. "We could be the largest brokerage in the country in a year."

Not if the National Association of Securities Dealers can help it. The trade group, which represents 470 marketmakers, has fired off repeated barrages of new rules aimed at crippling Houtkin's business. The association even threatens to cut him off by scrapping the order-execution capability of its advanced computer system, which it touts in TV ads as "the stock market for the next hundred years." Why the hysteria? Houtkin's clients stir up "waves of orders that increase short-term volatility," charges Richard Ketchum, chief operating officer of the dealers' group. "This substantially increases the risk for marketmakers, which winds up costing the individual investor more money."

Houtkin says he is merely using technology to give the little guy an even break. Under the small-order system, each marketmaker must trade at the | displayed quote price with no chance to adjust to whatever other firms are doing. The system simply assigns the transaction to the marketmaker with the highest bid or lowest offer at the time. Result: if a Merrill Lynch specialist happens to be away from his desk when a stock starts moving, a savvy bartender could swiftly pinch $250 from his hide for every quarter-point change in price. Without the automated system, Houtkin's clients would have to call brokers and have them place orders with a marketmaker. By the time all that was done, the price gap would probably have vanished.

The roots of the feud between Houtkin and the dealers go back to 1975, when Congress first nudged regulators to have marketmakers install computerized order systems to make stock trading more efficient. Congress said the firms should be encouraged to do so even if it meant that orders could be "executed without the participation of a dealer." The securities group unveiled its small-order system with great fanfare a decade later. But it was not until many marketmakers failed to honor their quoted prices in the Crash of 1987 that the group ordered all members to use the automated system.

The association now says it never intended the system to be used for rapid- fire trading, particularly at the expense of its own marketmakers. Fighting back, the group has limited the shares traded on the system to no more than 1,000 per transaction, and has restricted the number of trades for each account to just 10 a day. But All-Tech customers simply -- and legally -- open numerous accounts under different names. Meanwhile, Houtkin has sued the Securities and Exchange Commission in federal court to overturn the rules.

Defenders of Houtkin say the burden of proof is on dealers to show that small-order players really are harming the market. After all, these supporters contend, no marketmaker has bailed out of the dealers' association, and many Wall Street firms enjoyed record profits in the first quarter of this year. In response, the association sent the SEC a study last month that purports to show that traders using the system drove down the price of nine stocks, mostly health-care firms, during two weeks in February and March.

Other market watchers blame the drops on factors ranging from disappointing corporate announcements to investor fears about President Clinton's health reforms. "The NASD study is a pile of crap," says Morris Mendelson, a professor of finance at the University of Pennsylvania. "Dammit, these are retail customers at All-Tech! Just because they happen to be more interested in the market than the average investor, that's no reason to keep them out." That view is echoed by Edward Fleischman, a former SEC commissioner, who wonders, "How can the SEC justify approving any rule that takes liquidity out of the market? Once you've given people the capability of direct trading, you can't take it away."

While the sides battle it out in court, Houtkin plans to keep his revolution moving ahead, opening new branches and even placing computers in customers' homes so they can ride waves without getting dressed. "This is exhilarating," says 56-year-old Don Traponese, a high school dropout who earns $18,000 a year cutting hair. "I wish I could go to the races and be as successful as I am here." While Traponese has good days and bad days at All- Tech, he estimates that his part-time trading brings in about $12,000 a year. "Brokers over the phone will quote me higher prices than what I can see for myself is available on the screens," he says. "I think the powers that be are trying to keep us little guys down."