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January 1, 1999

Making More Money With Perishable Data: Traders Eye Extra Orders Capturing Buyside's Business

By Maureen Nevin Duffy

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  • Making More Money With Perishable Data: Traders Eye Extra Orders Capturing Buyside's Business
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Now it takes only nanoseconds for many trading desks to effortlessly deliver information electronically. How could the most vital data not possibly be used? Easy.

Information sent by the buyside, usually via the old-fashioned telephone, will perish soon after it arrives at a sell-side firm. That's unless the same data can be captured electronically and transmitted internally by sell-side desks.

The data includes the ubiquitous "bids wanted" and the natural orders that are the foundation of indications of interest (IOIs) data that could sometimes be used more efficiently given today's surging trade volume and the stock market's bouts of volatility.

Facing the prospect that potential buy and sell orders could escape the attention of sales traders handling the other side of this business, many desks are scrambling to develop systems that capture, store and disseminate critical pre-trade data.

Hambrecht & Quist's 40 equity-trading professionals in New York, San Francisco and Boston, for instance, enter the natural orders from their buy-side clients into an in-house system. That system in turn sends the data over the firm's wide area network supported by dedicated T-1 communication lines allowing individual traders to find the other side of potential trades, the sending traders' names and pertinent comments. All three locations are live on the system.

In hindsight, it all seems logical.

"Without a good system," said Steven Smith, head of application development at San Francisco-based Hambrecht & Quist, "you can get bit [for poor] customer service, and on the revenues side [you can also be hurt] by failing to let a customer know of a trading opportunity."

"A good system is critical for firms because, as you know, speed is money," added Joseph Rosen, managing director of New York-based Enterprise Technology Corporation (ETC). "To have the ability to send information across trading desks' [screens] showing you have the other side on the line makes sense. A cross for any trading firm is nirvana."

Proprietary Systems

Hambrecht & Quist is one of several trading desks that are building their own applications rather than using an off-the-shelf package. Smith opted for a proprietary system, claiming that vendor systems don't provide enough flexibility in tailoring software to users' needs. Another failure of the off-the-shelf packages: no access to the programs from any machine such as Windows, Macintosh and UNIX-based systems.

(An official for Weehawken, N.J.-based Automated Securities Clearance Corp., whose order-management and trade-routing system is probably the largest in terms of sheer Nasdaq order flow, says its system includes messages such as critical pre-trade data to be carried from one sell-side trader to another. )

For Hambrecht & Quist, the benefits of having a system are clear. "Most trading rooms have squawk boxes for what is called going over the top,' among a trade's principals the market maker or position trader and the sales trader," Smith said.

"They'll say, Netscape. We're a buyer of 50,000,' to let everyone know that they're looking for the other side of the trade," he explained. "You can put the [squawk] boxes on everyone's desk, but if someone gets up for a moment, or if they're in another city, that bit of knowledge disappears."