Hudson Holding: Pasternak's Involvement Makes This a Trader Firm to Watch

One way to trade is to follow the smart money. This usually includes watching for heavy insider buying and ownership in a particular company before taking a position. Recently, my interest focused on activity involving a small trader firm named Hudson Holding Corp. (HDHL). [[ more ]]

This $24 million New Jersey market maker, specializing in more than 7,000 small cap OTC and Nasdaq issues, saw intense buying interest from Kenneth Pasternak. Many of us following Wall Street headlines know Pasternak as the former CEO of one of the largest and most successful market makers on Wall Street known as Knight Capital Group. Pasternak left the company under a deluge of allegations of improper trading practices, but not until he took this small $250 million firm to a $2 billion market trading giant. Briefly, market makers generate business by keeping the markets liquid. They align buyers and sellers in securities. They, sometimes, actually buy and hold the securities from sellers until another buyer is found to purchase the stock. The market makers generally profit from the difference in the spread between the bid and ask of the stock they are making a market in.

No one did this better than Knight Capital Group and Ken Pasternak was a master at running the business. Now, Pasternak has come back to the market making world as an investor purchasing more than 1.6 million shares of tiny HDHL at .60 share and gaining an additional 833,335 warrants convertible at .85. This activity brought his overall stake in the company to nearly 24% or more than 9 million shares and warrants. Pasternak stated publicly that he is not going to have any inside involvement with the operations of the company and has acquired the stake solely as an investment for his own hedge fund.

Yeah. Right.

I am not certain this is entirely the case. Pasternak is to this industry what Henry Ford was to the automobile industry. He is a pioneer and knows this business as well as anyone. His experience and leadership at Knight Capital was the primary reason behind that company’s success. Now that he is freely putting his capital into a small market maker like HDHL, it definitely bodes well for the long term prospects of the company. Hudson Holding Corp. has reported about a 17% increase during the last six months in year over year revenue. Profits are flat, but can be attributed to the lower trading volumes in the summer months as well as the company’s recent expansion efforts. The company just moved into a 27,000 square foot, 140 seat trading floor in early September and has invested in new technologies to expand its trading capacity. Currently, the company also is adding to its professional trading and sales staff. It is looking to take market share in primarily those smaller less liquid securities where the larger market makers don’t wish to play, and believe me, there is plenty of that business.

I am not recommending this stock because it poses aggressive risk. It is highly illiquid - some days not trading any shares. It also sports a wide spread because it has a small float of roughly 3 million shares. The small float can be attributed to the company insiders owning about 85% of the company. Despite the risk, I do find Pasternak’s involvement with this particular company to be a positive indicator for the stock and deserves watching.

HDHL 1-yr chart

Disclosure: Author has no position in HDHL.