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Jared Dillian
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Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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August 31, 2001

A Chinese Menu For Market Makers: New Systems for New Generation of Regs

By Peter Chapman

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  • A Chinese Menu For Market Makers: New Systems for New Generation of Regs

A new generation of trading systems for Nasdaq market makers is hitting the Street. Whether it's a new version of the industry standard, BRASS, the in-house system at Salomon Smith Barney, a plugger from the U.K. or a couple of newcomers to the scene, all are bent on solving the problems brought on by new regulations and changes in the trading game.

Decimalization, SuperSOES, SEC Rule 11Ac1-5, and capacity increases are key drivers.

Below is a laundry list of some of the new features helping traders and their bosses cope. Systems and their owners are: SmartBrass by SunGard Trading Systems; Fidessa by royalblue; the Bloomberg Equity Order-Management System by Bloomberg; Tools Plus by Nasdaq Tools; and GATE by Salomon Smith Barney.

Big Brother

Big Brother is watching at firms that deploy SunGard's SmartBrass.

The OMS integrates with a brokerage's proprietary analytic system, giving management a picture of all positions entered into by all of the firm's traders.

Positions taken by BRASS traders are lumped together with those of other desks such as proprietary and derivatives where BRASS is not used.

Management gets a firm-wide view of its risk profile. The set-up also lets management change parameters on the fly. No longer is the Nasdaq trader solely in charge of his destiny.

With one eye on the firm's capital, management can make changes that affect position sizes intra-day.

For example, it can reduce a stock's automatic execution parameters from 1,000 shares to 100 if it chooses. Or, management can instruct BRASS to cease executing orders in certain securities against the firm's capital and route them out.

Agency Trading

Penny ticks are reshaping Nasdaq into an agency marketplace where traders represent customer orders rather than fill them from inventory. But agency prints can't be processed through the traditional principal accounts.

Buyside customers won't accept that. So, trading systems geared towards inventory accumulation and depletion need to adapt.

royalblue's Fidessa enables brokerages to match their orders with their executions. That's not as easy as it sounds, according to royalblue. A single trader may work several orders in the same security throughout the day for different customers.

It is nearly impossible for him to keep track of all the variables such as security, customer, time, price, quantity and order instructions. Matching fill with order requires a computer.

"When you execute, how do you know which order to send back if you didn't peel it off from that order to begin with?" asked Joe Chafatinos, an executive vice president with royalblue.

"Our customers want to be able to tie the execution to the order so they can treat it as an agency order," he added.

Compliance Officer's Dream

It happens. Sometimes, traders break the rules. Usually inadvertently, of course. Often because of fast-moving markets.

Bloomberg's new OMS - slated to go live at an unnamed brokerage this month - comes loaded with pro compliance features. If a trader has committed a serious violation, a pop-up window takes over his screen and forces him to act.

E-mails go out to desk heads and compliance officers as well. Less important alerts are color-coded or sent by e mail.