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February 1, 2000

Managing Fragmentation: Is Smart-Routing Technology an Improvement?

By Peter Chapman

Also in this article

  • Managing Fragmentation: Is Smart-Routing Technology an Improvement?
  • Page 2

Is there room on the buy

side for systems that help traders evaluate the exploding number of execution venues? Whether or not they are ever widely used by institutions, the introduction of so-called smart routing systems on the buyside shows that institutional and retail markets have common interests.

At the forefront of a push to sell smart routing technology to the buyside is an unlikely duo of vendors - daytrader software specialists and

Their push reflects a trend towards a greater dispersion of available liquidity, or increasing fragmentation. With the explosive growth in alternative trading systems, traders must keep tabs on more potential destinations for their orders.

Day traders, like the institutional pros, know the frustrations of accessing suitable pools of liquidity.

"In terms of robustness, order size, and order processing, the needs of institutions are similar to those of day-traders," said Omar Amanant, chief executive of New York's "Our technology will suit them."

Smart routing software is currently used by day traders to scan nine ECNs and SelectNet for the best possible trade. The execution is determined by the price of the stock and size of the order. Sometimes a suitable execution will also be determined by trading costs and response times. Once a trader enters his order, a smart routing system performs the rest of the functions necessary for an execution, vendors say.'s electronic communications portal (ECP) product and Austin, Tex.-based's CyBerXchange, route orders directly to ECNs, bypassing SelectNet to save time and money. has even started to link directly to market makers in order to eliminate SelectNet from the loop.

Soon the firm plans to announce deals with two of the largest market makers, according to Amanant.

While day trader software specialists are at the helm to push smart routing among institutional traders, an institutional third market trading firm is jumping on the bandwagon. Jefferies & Co., a technologically savvy brokerage, launched a system with connectivity to the New York, American, Chicago, Pacific and Boston stock exchanges, as well as to POSIT and the BRUT and Tradebook ECNs. The system is tentatively named de-frag' in a play on the word fragmentation.

Currently, 80 buy-side desks use Jefferies' OrderPath product to route orders to these exchanges and to Nasdaq outlets. The broker dealer's new product will build on OrderPath's routing functionality, but free the trader from the chore of picking markets and splitting orders.

The new Jefferies smart routing system has two main features. The first is an order-splitting mechanism that gives the buyside what the sellside has with the products Tools of the Trade and QMS, according Mike Alex, senior vice president, trading technology, at Jefferies. For example, if 5,000 shares of a stock are offered on the New York, 1,000 on the Chicago Stock Exchange and 1,000 on Instinet, the system will sweep all three markets for an execution.

The second feature includes a scripting language that allows programmers at an institution to chart a more sophisticated course for the execution of an order. For example, a large order could be worked by the machine on both the New York Stock Exchange and the periodic POSIT crosses, jumping back and forth.