Forbes article on Steve Schonfeld

Discussion in 'Prop Firms' started by george_s, May 8, 2005.

  1. Just read the Forbes article (May 23 issue)- "Last Man Standing" on Steve Schonfeld. The article seemed a bit unfair to me and had somewhat of a negative spin, and implied that Schonfeld is having a much harder time generating profits. It was also very critical of their recent acquistion of Heartland.

    I was considering opening up a retail account at Schonfeld's to use their automated trading platform. Would appreciate any feedback from anyone who has an account there- either retail or prop.
  2. Can someone please post the article here?

  3. I don’t think they are doing that well. They offer one of the worst deals in the prop world. They try to keep all the prop traders profits with holding periods and higher rates. They have there own clearing firm so the mark up all goes to them. The only people that would trade for them are net negative guys for the most part. There execution software is the worst. They have a lot of higher level guys living off the trader’s profits. If you can make money net you’re better off at another firm. Sure you can trade 10x the size at Schonfeld but you only make 20% gross of the profit. I think its a lot easier getting out of 3,000 shares instead of 30,000. I also think it’s easier to manage the smaller size and for a bonus you take all the profits.
  4. Sorry, I read it from the magazine, but I think you can read it for
    free on the web site if your register. Just go to and search on schonfeld
  5. Use Username: forbesdontbug
    Password: forbesdontbug

    Supplied by, which has usernames and passwords for all the registration sites.
  6. i know some boards delete articles for copyright reasons, so the mods might KO it..


    Last Man Standing
    Susan Kitchens and Michael K. Ozanian, 05.23.05

    Steven Schonfeld claims to run the biggest and most successful day trading firm left. Is he really any good?
    You remember those day trading banditos of the late 1990s. Most of them were particularly fond of Internet stocks and were incinerated when the Nasdaq blew up in 2000. But not all of them. One big one survives, and, if you believe his story, is prospering: Steven Schonfeld.

    Schonfeld oversees a harem of semi-independent traders who use his equipment, his software and his capital, sharing profits with him and paying him trading commissions. This operation yielded revenue of $200 million last year, he says, on which he netted 15% before taxes. Schonfeld says he has outlived his competitors because "we are infinitely better. We're more reputable than any firms out there because of a great regulatory track record."

    Which isn't saying much. The Schonfeld Group, with headquarters in Jericho, N.Y. and trading operations in New York and Florida, has racked up its share of admonitions and fines. In 1999 the New York Stock Exchange accused him, among other things, of extending $23 million in credit from his personal funds to set up customer accounts; maintaining inaccurate books and records; and allowing nonregistered employees to perform the duties of registered representatives. Punishment: a $1.3 million fine and a 30-day industry suspension. Schonfeld says he stopped the practices in question immediately, even though he believed they were "legal and responsible." Since 2000 he has been fined at least twice by the National Association of Securities Dealers for violations of rules on Nasdaq's small order execution system, or SOES, a mechanism for orders of up to 1,000 shares to be executed immediately at a marketmaker's announced quotes.

    By the Numbers

    Day Trippers
    While day trading is down, some folks hang on.

    750,000 Number of traders in U.S. who make more than 50 trades a year.

    $120 million Total revenue collected last year from Schonfeld proprietary traders.

    30,000 Number of traders who make more than 1,000 trades a year.

    135 millionAverage number of trades cleared by Schonfeld Group each day.

    Sources: Celent Communications; Schonfeld Group.

    To traditional marketmaking firms like Merrill Lynch, Morgan Stanley and their ilk, the day traders were looked down on as conniving villains who created unnecessary chaos and cost them millions in potential fees. To smaller investors, they were heroes, equal-market-opportunity providers who exploited excessive spreads between the bid and ask prices of over-the-counter stocks.

    Nowadays most of the frenzy has fizzled out. Schonfeld, a fast-talking Long Islander, evokes a bit of nostalgia as he insists that he is here to stay, despite depressed profit margins and an iffy market. He still counts on his so-called proprietary traders, those who trade on his firm's account, for the majority of his firm's revenues. He claims to be adding more traders all the time, but their contributions to overall revenues are declining, from 98% five years ago to 60% today, says Andrew Fishman, Schonfeld Group's president.

    Schonfeld, 45, got his start in day trading in the mid-1980s. The son of a fabricmaker in New York City's garment district, Schonfeld graduated with a business degree from Emory University and returned to New York. There, according to NASDdocuments, he took a job as a broker at Blinder, Robinson, the now-defunct penny stock peddler whose founder, Meyer Blinder, was convicted in 1992 of wire fraud and money laundering. After five years Schonfeld left for Prudential Bache Securities. While there, he started trading stocks for himself. To track his progress, he created a database of his first 50,000 trades, searching for patterns of success (among the variables: time of day, length of holding, industry sector). With $400,000, Schonfeld set up shop in Great Neck, N.Y. in 1988. He hired a couple of friends, assessed their trading habits and recorded them in one of his myriad databases. Schonfeld still holds in excess of 90% of his firm.

    Day trading is a game of leverage. Outfits like Schonfeld's often exercise approximately 10-to-1 buying leverage on the firm's net capital, that being roughly the same as net worth. Day trading companies let their traders use this buying power on an intra-day basis to buy on steep margin, much steeper than they could get from an ordinary retail account at a Merrill Lynch or a Charles Schwab & Co. Day trading firms can escape the usual margin limits as long as they have the capital to cover any potential losses at the end of the day.

    Most day trading firms required their customers to put up $25,000 in order to tap into the firm's buying power; traders could keep all their profits and, of course, had to eat the losses. Schonfeld was different: His traders didn't have to ante up. Instead, he distributed his firm's buying power electronically to individual accounts. He would keep between 35% and 40% of their profits, plus fees charged as commissions. Schonfeld would also pick up 100% of any trading losses. Traders hit the screens only after Schonfeld put them through a boot camp of sorts, where they did paper trades and learned how to use the firm's programs. Key program: a filtering tool called Schon-site, which lets traders screen for such variables as volatility, liquidity, industry sector, individual markets and price.

    Schonfeld retained complete control of the risk via his computerized system, monitoring every move by his hundreds of captive traders. Since Schonfeld participated in a trader's upside as well as his commission fees,"It was a brilliant, commission-churning business that heavily stacked the odds in favor of the house," says someone who once did business with the firm. Schonfeld also took the hit on losing traders, but those who lost money were shut down quickly. Between 1999 and 2001, Schonfeld says, he paid out $685 million to 1,100 traders who worked for him.

    That's tough to verify, given how closely day trading firms hold their numbers. The Securities & Exchange Commission doesn't require them to file quarterly income statements, balance sheets or statements of cash flows, as public companies must. They're obliged only to report their balance sheets once a year; once a month they file net capital reports.

  7. Still, a financial snapshot emerges from Schonfeld Securities, the arm that does trading with Schonfeld's capital. Once the main engine of Schonfeld Group, the securities unit is in decline. Its assets shrank from $2.5 billion on Mar. 31, 2000 to $670 million four years later. Over the same period net capital dropped from $110 million (4.5% of assets) to $24 million (3.6% of assets). Moreover, an income statement for fiscal 2003, perhaps mistakenly filed, notes that the firm lost $25 million on $106 million in revenue. Fishman, the president of Schonfeld Group, predicts brighter days. "We have trading technology in place so that if the market gets healthier," he says, profits will soar.

    Fishman says that looking at the securities unit's finances "doesn't paint the whole picture," because the unit now accounts for less than half Schonfeld's $1.3 billion or so in assets and $200 million in revenues. He does concede that the profit margin on the house trading has fallen from 33% in the late 1990s to 10% today. (Meaning: For every $100 made from stock price gains, $90 is eaten up in overhead and fees to trading networks like Archipelago.)

    Schonfeld Group has shifted more into commissions, which now account for around 25% of Schonfeld's revenue, up from almost nothing five years ago. That alone won't save the firm, since commission rates have been falling--from $20 per 1,000 shares in the early 1990s to an industry average of $5 today. Schonfeld charges retail customers, who do not work for him but use his systems, $3 to $5. "Used to be that every day was a big money day," says a former day trader at Datek Securities. "Now it's about not losing money, holding on until you can make a little bit of money."

    That seems to be Schonfeld's problem. Since 2000 Schonfeld's total revenue has plunged from $600 million to $200 million. Fishman concedes that Schonfeld Group expects to see flat revenues and thinner margins overall this year.

    To survive, Schonfeld needs more bodies--traders who can churn stocks and create commissions. That was the impetus behind his most controversial acquisition to date: Heartland Securities, once one of the biggest day trading houses, with 300 traders. At the time of Schonfeld's bid, in January 2003, Heartland was nearing bankruptcy and the SEC had accused its principals of carrying out fraudulent trading practices, first at Datek Securities, and later at Heartland, which took over Datek's business. The complaint alleged that Heartland and some of its executives--including Sheldon Maschler, his son Erik and technology wiz Jeffrey Citron (founder of a private trading system called Island and today head of the Internet telecom firm Vonage)--had devised and used a "fraudulent scheme" to exploit the SOES system for illegal trading. According to the SEC, they covered up the scheme by creating false trading accounts and filing fake reports with regulators. Sheldon Maschler was fined $29.2 million and Citron $22.5 million--among the largest penalties ever levied by the agency against individuals. Schonfeld acquired the distressed company's assets--its traders, computers and software systems. He inherited none of Heartland's legal woes, but Schonfeld brought on several former Heartland executives, including Lee Maschler, Erik's brother.

    Whatever its sordid past, Schonfeld wanted Heartland. Nine days after the SEC's complaint, he locked up the assets in a nondisclosure agreement with the Maschlers--which essentially prevented Heartland from seeking bids from anyone else during a two-month period, say the company's creditors. Those creditors also complained that Schonfeld imposed an "egregiously high" breakup fee, equal to 20% of the cash portion of the purchase price, or $300,000; reasonable fees, they argued, ranged from 0.65% to 3%. Over the objections of its creditors, the bankruptcy judge allowed Heartland to sell its assets for $4.2 million, including $2.7 million in assumed debt, to Schonfeld and another firm, Trillium Trading.

    Trillium, it turns out, was headed by Lee Maschler, who was also an equity owner of Heartland. That apparent conflict of interest rankled creditors, who felt they couldn't get a fair deal. But "at a certain point," says the creditors' attorney, Stuart Komrower in Hackensack, N.J., "people just wanted to put the deal behind them." Schonfeld took a 50% equity stake in Trillium; Lee Maschler became a principal of Schonfeld Group. The deal "was a good business opportunity to grow the firm," says Schonfeld. But why associate himself with a company tainted by fraud? "Good question," says Fishman.

  8. Interesting! Thx for pasting the article!
  9. They told me the reason they left was because like the article, his firm keeps a ridiculous amount of their own profits, and their trading platform is nothing at all spectacular. Their "proprietary" formula consisted of buyng blindly and averaging. They got so much press because of the 90's bull market and now their BUY BUY BUY strategy isn't going so well. Mind you, only a very small handful of their traders were barely up for last year.
  10. heavy


    I just like that he worked for Blind 'em & Rob 'em.
    #10     May 9, 2005