Folder 137

NYC 9/11 Public Portal Document

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made quite a bit of space for itself in these transactions. There are many, many ways to play the Treasury bond market. Howard Lutnick was well-versed in "rolls." What are rolls? A roll trade takes place between the day the Treasury announces it will auction off a new issue of a government security and the day the auction occurs. Bond traders thrive on playing the spreads between existing securities of comparable yield and maturity and the forthcoming issues. Lutnick needed to figure out how to use Cantor's edge. According to a number of ex-Cantorites, for a time Lutnick and his Investment Strategies Group traders had access to the internal screens that the wholesale brokers used in Cantor's government securities brokerage rooms. At the bottom of those screens is a data crawl known as a waterfall that shows, by account number, which customers have been the buyers and sellers in the last few trades in a given security. [Photograph] Caption: Howard Lutnick and Iris Cantor Smiles no more.

The brokers use the waterfall to keep track of the order flow. But knowing who is doing the trading is a clue to how big or well-informed the buying may be. Is it a primary dealer like Lehman? Is it a smart hedge fund like George Soros' Quantum? Or just a large company investing surplus cash? The customers are not supposed to have this information. Cantor denies that the traders in Investment Strategies Group ever had access to the waterfall, but that is flatly contradicted by several former Cantorites. James Avena is now the president of New York-based Tullett & Tokyo Securities, but from 1982 to 1990 he ran Cantor Fitzgerald Securities. Avena says he told Bernie Cantor that Lutnick and his crew were peeking at the waterfall while trading. Cantor put a stop to it, Avena says. First Nevada first Howard Lutnick kept looking for other ways to leverage the franchise. In the late 1980s Bernie Cantor did not want to use his firm's scarce capital for trading, but he was willing to let Lutnick trade on his own. So Lutnick set up Solomon Partners, a private trading partnership named for his father. It was open from 1988 to 1990. He must have done well, because Cantor soon wanted a bigger piece of the action. In 1990 Lutnick created a better-capitalized private partnership, First Nevada Associates, with most of the capital coming from Bernie Cantor.

Though in theory First Nevada was a separate entity, it functioned like a house inventory for Cantor Fitzgerald & Co.'s Investment Strategies Group. When it was inconvenient for Cantor Fitzgerald to carry a position on Cantor's books, it might be carried on First Nevada's. Or First Nevada might be used to process a transaction or book a profit. First Nevada was active from October 1990 through December 1992. Between its founding and midMarch 1992, the account generated over 1,000 pages of transactions, nearly all of them in U.S. government securities.

Was First Nevada a sham account, a way for the house at times to covertly trade for itself against customers? Cantor Fitzgerald has always maintained that First Nevada was an independent customer of the firm. Yet several times in January and February 1992 First Nevada's profit-and-loss position was noted in the margin of Cantor Fitzgerald & Co. blotters exactly the same way that such notations were regularly made for the house's alphabetical inventories. On many days First Nevada's trading easily made it Investment Strategies Group's biggest customer. Mar. l earlier on margin. account was wound down.

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