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June 30, 2001

Direct Access As A Trading Tonic: Connectivity and Nasdaq's 'Nuclear Weapon'

By Peter Chapman

Also in this article

  • Direct Access As A Trading Tonic: Connectivity and Nasdaq's 'Nuclear Weapon'

Vendors blew the horn for direct access at this year's Securities Industry Association Technology Management Conference & Exhibit.

For three days in June, hundreds of vendors packed three floors of the Hilton New York, holding court in its booths, conference rooms, and suites. Some touted electronic connectivity to the point of sale as a tonic for frustrated traders on both sides of the Street.

At the booth of Spear, Leeds & Kellogg, a unit of Goldman Sachs, a revamped REDIPlus order routing service was pitched as a solution for the buyside. Many institutional traders have bought order management systems in recent years, but still find it difficult to get their orders out.

REDIPlus became the property of Goldman last year when it acquired SLK. Traditionally used by the small broker dealer customers of SLK's clearing division, the front-end is being reworked to appeal to Goldman's institutional clientele.

The technology currently allows users to send orders to DOT, SLK's Nasdaq desk, the REDIBook ECN, and SelectNet. SLK will add, as a destination, the NYSE's Institutional Xpress block-trade mechanism to appeal to institutional traders.

And, in an eyebrow-raising move, Goldman will also permit institutional users of REDIPlus to route to any broker they choose. They are not limited to the desks of Goldman or SLK. Any broker willing to build a FIX connection to SLK's proprietary REDINet network can receive REDIPlus-derived order flow.

Goldman is not stopping there. It will also allow its customers to send their orders directly to the NYSE's BBSS (Broker Booth Support System), an OMS used on the floor primarily by $2 brokers. So, not only is Goldman helping its customers access its upstairs' competitors, it is also helping them bypass the upstairs establishment entirely.

Goldman is not the only broker to go down this road. Also at the SIA show, Bridge Trading debuted new functionality in its IOE order routing service that gives its buyside customers direct access to brokers on the floor of the NYSE as well as Institutional Xpress. Bridge is a member of the exchange, but relies on a network of independent brokers when trading there. "We think there are certain Bridge Trading clients who would like to access our floor network directly for certain types of orders," said Mark Minister, outgoing Bridge Trading CEO. And last year, ITG built a network that allows its customers to route orders to 40 of its competitors.

Why are they doing it? First, they want to get their front-ends on customers' desktops. Second, their customers want to route to multiple brokers. Third, the brokers accept that they won't win 100 percent of their customers' order flow anyway. And, fourth, they get paid for the service.

Down the Aisle

Just down the aisle from the REDI booth was competitor Townsend Analytics, a pioneer in the direct access game. Like REDIPlus, its RealTick service bureau delivers market data to traders and routes their orders to market centers.

Half of its customers are retail (read: daytraders); half are institutions. Institutions are primarily small and mid-sized broker dealers and hedge funds. Ironically, it does claim Goldman Sachs as a customer, though. RealTick is also the official front-end for the Archipelago ECN, also developed by Townsend.