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December 1, 1999

Bright Future for Routing Systems? Some Expect Electronic Networks to Become

By Peter Chapman

Also in this article

  • Bright Future for Routing Systems? Some Expect Electronic Networks to Become

Volume is low, but electronic order routing networks have plenty of cheerleaders. Network executives say volume should rise when more dealers and institutions discover the networks' efficiency.

"Order routing is still in its infancy, but it's starting to go mainstream," said John Spensieri, product manager at AutEx/TradeRoute, adding that trades on the network have grown from 1,000 trades to 3,000 today.

Steven Levy, chief executive of the MacGregor Group, operator of the MacGregor Financial Network, said revenues from the routing network have grown 50 percent annually since it was introduced in 1997.

Driven by the increasing usage of FIX, the financial information exchange protocol, and the proliferation of order management systems, buyside traders are routing more shares of stock through network circuits. Network companies are beefing up their sales forces, upgrading their facilities, introducing new products and expanding overseas.

Five network companies compete for the bulk of the buyside-to-sellside traffic. Three offer bandwidth plus connectivity services: Bridge Trading, the MacGregor Group, and AutEx/ TradeRoute. (AutEx/ TradeRoute is operated by AutEx, a Thomson Financial company. Thomson Financial is the owner of Securities Data Publishing, the publisher of Traders Magazine.) Other networks provide bandwidth only: Transaction Network Services and IXnet.

Based on industry estimates and transaction volume supplied by several vendors, these companies handle up to 40 million shares daily.

To be sure, that's a tiny percentage of the overall volume handled daily by institutions but network executives see huge numbers ahead.

"We were early in predicting when the hockey stick effect would kick in," said Mark Minister, president of Bridge Trading Systems, referring to a graph curve that shoots straight up. "But probably in the next couple of years you're going to see the volume of orders managed electronically skyrocket."

Disappointment

Minister and others admit they are disappointed by the low numbers so far and say it is because of the institutions' reluctance to route their working orders,' or large block trades, electronically. Orders passing through the AutEx/TradeRoute network, for example, average only about 1,000 shares, according to Spensieri. Buyside traders still prefer to phone in the larger trades in order to get market color' and make suggestions as to how those trades should be handled.

At least one analyst doesn't believe that will change anytime soon. "I don't think you'll see much of an increase in traffic for order messages," said Rob Hegarty, a former trading technologist with mutual fund giant Putnam Investments and now a consultant with the TowerGroup. "It will take a major cultural shift to send large orders electronically. Three to five years down the road, maybe. I mean you can look at the electronic communications networks and see the same problem. These institutions just don't want to put large orders on ECNs."

MacGregor's Levy disagrees. "Routing networks won't eliminate the telephone call, that's true," he said. "What they will do is supplement it."