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June 30, 2001

Pooling Fragmented Market Liquidity: Vendor's Buyside and Sellside Approach

By Peter Chapman

Also in this article

  • Pooling Fragmented Market Liquidity: Vendor's Buyside and Sellside Approach

Frustrated by fragmentation in the Nasdaq market? Fret no more, says a new vendor.

Lava Trading, a New York-based service bureau, is marketing technology that gathers and consolidates onto one screen every limit order and every quote found on most major ECNs and in the Nasdaq montage. It also permits traders to route orders directly to the ECNs, SelectNet, certain alternative trading systems, and even SuperDOT.

Lava is targeting pros on both the sellside and the buyside. Nasdaq market makers, proprietary traders and program traders at some of the top investment banks are users, according to the company.

Nasdaq market makers, proprietary traders and program traders at some of the top investment banks are users, according to the company.

Lava, co-founded in early 1999 by two Wall Street consultants, is positioning its service as a solution to the problem traders often face when trying to execute large blocks of Nasdaq stocks. Liquidity can be hidden amongst several market centers, making it difficult for the trader to know where and how to trade the stock.

The Nasdaq montage has its limitations. It only displays participants' best price quotes and, usually, minimal size quotes. It also does not display the thousands of other orders residing on ECNs. Those orders are critical since ECNs now account for about 30 percent of all Nasdaq volume, according to analysts.

As a result, trades for thousands of shares must be fed piecemeal into SelectNet to interact with quotes or limit orders of mere hundreds of shares. That vexes large-ticket traders more concerned with getting the job done before the market moves than obtaining the best price.

"You can get a lot done electronically, very quickly, when you can harness all the liquidity in one place," said Lava's chief executive Richard Korhammer. "Some of the biggest market makers on the Street are using us and they can pump in really big orders."

Korhammer won't divulge the names of his customers, but Fred Hughes, co-head of market making at Robertson Stephens, confirms his group is using the technology.

Lava is not the only game in town but it is a good example of the technology. Direct access brokerage Blackwood Trading gives day trading customers a look at the books of the major ECNs. Townsend Analytics began offering the service this year while SunGard Trading Systems is in talks with ECNs to do something similar via its PowerNet product.

Components of System

The service comes with a front-end called Trading Floor for viewing data and inputting orders. Its core technology, called ColorBook, aggregates and transmits the market data and facilitates executions. (Trading houses or their sponsors must be subscribers to or members of the various markets to trade on them.) The name ColorBook refers to Lava's association of each ECN with a different color; it is a spectrum of order books.

The product does have its limitations, according to market sources. Users can't view the depth of the book on Instinet as the broker dealer does not permit third party vendors to transmit more than its best quotes.