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September 30, 2001

Are Liquidity Finders The Next Brave Step? Ex-NYSE Tech Chief's Intelligent Agent Vision

By Peter Chapman

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  • Are Liquidity Finders The Next Brave Step? Ex-NYSE Tech Chief's Intelligent Agent Vision
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After spending nearly 20 years as a technology executive at the New York Stock Exchange, it's no surprise that a virtual Big Board is suggested in Chris Keith's vision of a stock market for the 21st century. In this brave new world, robotic floor brokers dart from electronic post to electronic post trading stocks with other robotic floor brokers.

To that end, the 70-year-old Keith, chief technology officer at the Big Board until 1989, claims to have harnessed emerging intelligent agent' technology to create a liquidity-seeking system that will antiquate all other forms of trading.

The first tangible result of his new research for ExchangeLab, the technology incubator that he heads, is expected by the end of the year. It is a product called InterELF.

This leap from the drawing board to the assembly line is made possible by a $6 million investment into ExchangeLab by Salomon Smith Barney, Madoff Brokerage & Trading Technologies, an affiliate of Bernard L. Madoff Investment Securities, and Sri Lanka's Millennium Information Technologies. Millennium, best known for building electronic stock exchanges in Sri Lanka and Malaysia, will build InterELF.

A new corporation, also called InterELF, has been registered to commercialize the technology. Just a shell at this point, it will have an exclusive franchise in the financial industry. It will both operate the system and license the technology to brokers and others.

If accepted by traders, the finished product will be a network of sellside and buyside desks, exchanges and alternative trading systems (ATSs) interacting through intelligent agents called electronic liquidity finders' (ELFs).

Overseeing the interplay between two ELFs will be umpires,' software applications embedded with rules of conduct written by the individual participants. Keith likens the ELFs to floor brokers and the umpires to specialist posts.

"This is a new model of the market," he said. "It has all of the efficiency of an electronic book, but it preserves the nature of the relationship between two people. It's hard to imagine, in ten years, anything of size being done any other way."

Electronic books - ECNs or the limit order books of specialists and market makers - may be the state of the art of electronic trading, but their capabilities are limited, Keith says. "Individuals can do something that electronic books cannot," he explained. "They can agree on a price and execute at the same time."

Using an ECN, for instance, a trader might post a bid at 10 a.m., but not receive an execution until 10:30 a.m. In addition, a buyer may be willing to pay $33 per share while a seller may be willing to accept $32. Whichever posts first, loses.

So, while an ECN is nominally an agent, it's a relatively dumb' one. It may offer smart order-routing and reserve functionality, but it lacks the human characteristics of an ELF. An ELF doesn't just route orders away; it sticks with them. It can take special instructions from traders. It can request information of others. It can locate vest-pocket' liquidity. It can execute against standing orders or it can negotiate with other ELFs.