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Tim Quast
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We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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June 30, 2001

The Mother of All Stock Marts?: Cash-Strapped Species May See the Light

By Brian O'Connell

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  • The Mother of All Stock Marts?: Cash-Strapped Species May See the Light

It's the Holy Grail of securities trading systems. And to traders at least, it is a journey with seemingly no end in sight.

At issue, is the seamless convergence of ECNs, exchanges and market makers into one electronic stock market, handling executions for all 8,000 New York Stock Exchange and Nasdaq stocks.

The goal is equity trading communities that reduce trading costs, making stock supply and demand visible, matching investors with complementary trading preferences, while letting investors anonymously negotiate prices.

The good news is that the technology now exists. The bad news is that the company that developed it - Wofex, Inc. of New York City - may not exist much longer because of financial difficulties.

But there is hope that Wofex will survive in some shape or form -- either as a revitalized entity with a new infusion of cash, or under new owners.

Until now, technology gurus trying to reach that Holy Grail have looked more like Monty Python than King Arthur, bumbling along while satisfying few in the process.

The closest Wall Street has gotten to a uniform securities trading platform may be the electronic communications networks, analysts say, as some struggle to survive in the face of a possible assault from Nasdaq's SuperMontage. On the surface, ECN's have fared well, capturing some 30 percent of the daily Nasdaq volume, according to the TowerGroup, a Needham, Mass.-based securities industry consultant. However, the proliferation of ECNs has led to more market fragmentation and inefficiency, says the TowerGroup.

"ECNs are merely an intermediate stage in the evolution to a more efficient market structure," TowerGroup noted.

Primary ECN problems include inferior performance and fragmentation. Todd Eyler, a senior analyst at Cambridge, Mass.-based Forrester Research, said the main problem with ECNs is that they actually slow down trade execution.

Industry distractions have gummed up the works as well. SuperMontage, for example, wants ECNs to transmit their orders through a central Nasdaq server, thus potentially threatening investors' ability to select their own execution vehicle. Another problem for ECN's: they can only execute trades through the continuous matching of limit orders.

Analysts say the solution is in the merging of direct access trading at ECNs and crossing networks, with the capital commitment of market makers on the NYSE and Nasdaq - along with the provision of access to all types of liquidity in one integrated platform.

Wofex has developed that product: an electronic trading technology that ECNs and market makers seem to want. But in mid-June, the company abruptly cut staff significantly and was reportedly shopping for someone to buy the technology, if not the company.

Project Duo

Two years in the making, Wofex is the brainchild of New York City-based Wofex, Inc. and its chief executive Richard Kelly, a former executive at Instinet and ECN director at Anderson Consulting. (Co-founder William Chrystal built trading systems for both J.P. Morgan and Anderson Consulting).

The company's Wofex electronic trading platform was slated to go live by the end of this July. Wofex garnered $3 million from Media Technology Ventures in financing while Hewlett-Packard loaned Wofex $15 million in convertible debt. Neither company would comment on Wofex's future or a possible role in any buy-out scenario.

Whatever the company's future, Kelly says, the technology works just fine.