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March 1, 2000

Industry Watch - Bringing BuysidersTo the NYSE Floor

By Peter Chapman

Buy-side traders have a new electronic incentive to trade directly with NYSE independent floor brokers.

The two groups don't conduct much business with each other, but a new technology company hopes to change that.

New York-based Gateway Financial Technologies is creating a network of independent floor brokers, allowing them to communicate electronically with both their buy-side and sell-side customers.

Gateway has deployed technology that bridges the gap between the messaging protocol used by the New York Stock Exchange and that used by a growing number of trading desks.

Founding members of Gateway include New York's Javelin Technologies; the Reston, Va.-based network company, Transaction Network Systems; and NYSE floor broker A.W. Bertsch. AutEx, a Thomson Financial company which operates TradeRoute, the FIX-based order routing network, is a strategic non-equity partner.

Gateway will run a service bureau that makes more forms of electronic communication possible between the Big Board and some institutions.

The NYSE uses CMS, the Common Messaging Protocol, to enable order routing between member firms on and off the floor. Advanced buy-side desks use FIX, the Financial Information Exchange protocol, to route orders to the sellside. Gateway will run a service bureau that utilizes technology from FIX leader Javelin Technologies to enable CMS to talk to FIX.

The new company plans to find its customers among the approximately 300 independent floor brokerages at the NYSE. Those recently signed include Bertsch, 508 Securities, J.M. Duryea, and the Griswold Company. Two-dollar brokers traditionally represent commission house brokers such as Merrill Lynch, but some work directly with buy-side desks. That's where TradeRoute comes in.

TradeRoute is a FIX-enabled order routing network that connects about 550 buy-side desks with 350 sell-side desks. Much of the order flow into the Gateway network is expected to come from this channel. The CMS-FIX link will effectively allow the majority of NYSE floor brokers to plug into the sprawling TradeRoute for the first time. Currently, Bertsch is the only NYSE floor broker on the network.

TradeRoute customers will not pay additional charges to access the floor brokers. Buy-side users, on the other hand, must be sponsored by a floor broker.

Many of TradeRoute's sell-side customers are also NYSE-member commission house brokers. Most route orders to the floor via the NYSE's Broker Booth Support System (BBSS), using the CMS protocol.

Their need for another route is questionable. Gateway chief executive John Petschauer, previously director of technology at the NYSE's trading systems division, concedes that the largest potential user pool is on the buyside. But he noted that Credit Suisse First Boston and Fidelity Capital Markets have signed on to use the service.

By most accounts, direct trading by the buyside with floor brokers makes up no more than three or five percent of the total order flow on the floor. But the efficiency of a direct link could boost that.

At least one trader at a significant buy-side firm is cautiously optimistic about the Gateway scheme. "It has the potential to be an important development," said Terry Goodwin, head trader at Goldman Sachs Asset Management. "There are certain instances where direct electronic access to the floor will make the process faster and more expedient. But you have to look at it on a trade by trade basis."