Four a.m. Pacific standard time. From the 33rd floor of the Union Bank Building, the cityscape below is a dark mural of shadowy forms and thousands of muddy-yellow street lights.
As Los Angeles slumbers the Jefferies Group traders are punching in.
One by one, they trickle onto the worn parquet trading floor. Pick up a morning paper. Stop by the huge buffet breakfast spread. Grab a danish, some bacon, perhaps a bottle of fresh orange juice to wash it down. And head for their video terminal and telephone-covered desks.
Center stage, sleeves rolled half-way to his elbows, Boyd L. Jefferies is already on the phone. He's joking with Irwin Jacobs about his stake in Unocal Corporation. ``Papers say you're No. 2,'' he chides the New York arbitrager.
As is his custom, the salt-and-pepper-haired chief executive arrives around 3 a.m. Officially, each morning begins with a companywide conference call at 5:10 a.m. Client calls at 6. The market opens at 7.
Mr. Jefferies spends the day in the thick of trading. In fact, he relishes it. And it's not unusual to find him doing business at 4, 5, or 6 o'clock in the evening. Jefferies's legendary hours -- and the aggressive trading team assembled daily before dawn -- have proven a successful formula. This West Coast-based brokerage firm ranks as the premier ``third market'' player.
Unless you're in the business of buying and selling blocks of stock -- more than 10,000 shares -- you may not have heard of Jefferies. It's no giant; perhaps finishing among the top 40 brokerage companies in terms of capital. And it only captures about 3.5 percent of all institutional trades (compared with about 14 percent market share for Goldman, Sachs). But, every now and then Jefferies snatches the spotlight -- usually when trading stops on the New York Stock Exchange.
Typically, NYSE trading halts come when a buying or selling blitz hits a particular stock. The specialist making a market in that stock may not be able to handle all the orders. Or the company experiencing a run on its stock may ask the exchange to stop trading in its stock and give the market time to cool off. When that happens, all brokerage houses that are members of the NYSE must stop trading that stock -- at which point, the ``third market'' swings into action.
The third market consists of half a dozen non-NYSE brokerages; about 70 to 90 percent of the trades are garnered by Jefferies. The third market operates like the over-the-counter market, matching buyers and sellers by phone -- but the trades are larger. Over the last three or four years, Jefferies has used the NYSE interruptions to make a name for itself, not to mention picking up some quick profits along the way.
For instance, last month Data General Corporation threw a scare into investors when it announced unexpectedly poor earnings. ``We were trading prior to the New York open,'' recounts Jefferies's president, Ronald A. Alghini. The NYSE was deluged by sell orders and delayed the opening of Data General stock by 50 minutes. During that period, ``We did in excess of 500,000 shares,'' boasts Mr. Alghini. (On a normal day, he says, Jefferies will trade about 3 million shares.) By the close of the day, Data General stock had dropped 14 points.
Jefferies draws criticism as a renegade -- skirting rules, profiting from and contributing to a disorderly, frenzied market situation. But Securities and Exchange Commission officials say there's nothing illegal about it. Explains Mr. Alghini, ``Bottom line: the public is more readily served during periods of adversity or disruption. Our role is not to be an adversary of the NYSE. It is to provide liquidity to our clients -- and to make money, of course.''
However, the gregarious president notes that the opportunites to profit from NYSE closings has diminished in the last year. ``The New York Stock Exchange has responded to our off-board trading by making their specialists more responsive. Normally, [in a case such as Data General's] the NYSE wouldn't have opened for three or four hours.''
But Alghini isn't worrying about fewer trading gaps at the NYSE. These episodes account for only ``2 or 3 percent of our total business, maybe less,'' he says.
Jefferies's bread-and-butter business comes from orchestrating trades in a niche left untouched by most brokerage firms: block trades in obscure, thinly traded stocks. And it has a reputation for doing it quickly and discreetly.
At most brokerage houses, one or two floor traders are assigned specific stocks. At Jefferies, when a sell or buy order comes in, over 100 traders and sales people get a shot at filling it.
The unique method for accomplishing this assaults one's ears upon entering trading room. From ceiling speakers comes a low static hum punctuated by bursts of trading lingo (``D19 has 25 to 50 K mart to sell at 32''). A microphone mounted on each desk gives everyone access to a live intercom system that links Jefferies offices in New York, Los Angeles, Chicago, Atlanta, Boston, Dallas, and London. If the Boston office gets a sell order for K mart stock, all traders will check their client lists for possible buyers.
Discretion is built into the system with every client given a code name. And ``Jefferies traders are noted for being individuals who keep their mouths shut,'' says Perrin H. Long Jr., securities analyst at Lipper Analytical Services, New York. No wonder. The company policy is that loose lips will lose you a job.
Boyd Jefferies's hard-nosed attitude makes his firm a favorite of the arbitrage and takeover players. ``Wall Street is the biggest rumor mill. Those guys have no conscience about letting the world know who their buyers and sellers are,'' says Jefferies.
The closed-mouth policy also serves as a selling point as the firm expands into new trading areas. With proceeds from a public offering in late 1983, Jefferies has hired about 50 of the 100 brokers to staff a new retail department. The target is Rule 144 block trades made by corporate insiders, which will, in turn, increase Jefferies's institutional trading liquidity. Under SEC Rule 144, executives who hold big chunks of company stock not bought on the open market can sell a percentage of the stock every six months after holding it two years.
Analysts note that Jefferies is one of the best managed firms in the brokerage business. Many firms lost money in 1984, but Jefferies earnings will probably finish slightly above 1983. In fact, analysts are hard pressed to find fault.
Is the company expanding too fast? ``Maybe. But Boyd Jefferies is not one to continue if a department is not producing desired results. He gets out quickly,'' says Mr. Long. Too much of a one-man show? ``Perhaps. But you just don't know until something happens.''
On a smaller scale, Jefferies is diversifying into fixed-income, municipal bond markets. And the London office, opened last month, is a move to capitalize on the deregulation of the British securities market in January 1986. The London office is but one in a row of notches Mr. Jefferies plans to carve in the brokerage business.
``It's a huge securities market out there, nationally and internationally, and we are trying to build our sales force so that we are in contact with every pool of money, every investor, every professional investor through out the world. That's a long process. We haven't even scratched the surface. . .,'' he says.
The laconic Jefferies talks about a more permanant all-day, all-night setup with offices in Tokyo or Hong Kong. Indeed, with the London office on the speaker system, Mr. Jefferies is now greeted by employees who have awakened even before he has. And he points out, ``In three years we will have a 24-hour speaker system.''
The hard work and long hours in the world of Jefferies could pave the way to round-the-clock trading.