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March 1, 2001

The Basket TradingTechnology Boom: Young Turks Pledge Faster Basket Executions

By Peter Chapman

Nasdaq orders are routed to both market makers and ECNs in a "round robin" system. If two market makers both have the best price, then each gets a piece of the order. That's to avoid annoying market makers by routing too many orders to them too frequently, said Harrison.

QuantEX does not offer so-called "smart routing." The round robin method precludes the system making a decision as to the best price, according to Harrison. He notes, though, that ITG is working on an addition to its Smart Server product line that will make "intelligent" decisions about routing OTC orders across a variety of markets.

QuantEX will route to ECNs where it is easier to trade size, according to Harrison. The problem, he says, is cost. Some ECNs are cheap, but some are "extremely expensive." ITG passes on those costs to customers. QuantEX routes to six ECNs, but not the largest, Instinet.

Orders for listed shares go to the primary and regional exchanges, but not to the third market. QuantEX has routing arrangements with 20 different broker booths on the floor of the New York Stock Exchange, including Jefferies' floor brokers. Harrison stressed ITG's POSIT crossing system is just another destination that receives no preferential treatment.

TLW

TLW Securities, a broker dealer controlled by Goldman Sachs' Spear Leeds & Kellogg division, routinely ranks among the top ten program traders on the New York Stock Exchange. Founded in 1991 by Tom L. Williams, an ex-arbitrageur with NYSE specialist Wagner, Stott, it processes an average of 75 million shares per day on behalf of its largely sellside clientele.

The product is TradeFactory. Customers access it as a service bureau or by way of TLW's discount brokerage operation. Most customers are sellside program desks executing orders on behalf of customers or sellside proprietary trading desks. Their huge trades demand high throughput and reliability.

"People who use our system are interested in how many orders per second they can move through our infrastructure," Williams said. "We can move 250 orders per second and have multiple instances of this infrastructure running at any one time." That means five or six trades can occur simultaneously, each running 250 orders per second. (For its part, ITG claims it can process 150 orders per second.)

Williams says his customers are all extremely sophisticated, well-capitalized technology-driven traders. "They have to be well-capitalized because the strategies they engage in are capital-intensive," he explained. "Strategies can involve $500 million or $1 billion worth of securities on both [the long and the short] sides. That is at the high end, of course."

Although essentially a workhorse for big arbs, TLW has been dressing TradeFactory up with layers of modeling functionality. Algorithmic control mechanisms that automate trading decisions and software for portfolio analysis and optimization are being integrated into the system.

"We'd like to get to the point where someone who wants to implement a quantitative strategy would need no technology except ours," Williams said.