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February 1, 2002

Top Order Router In Brokerage Game: A Cheaper Fix for Small Broker?

By Peter Chapman

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  • Top Order Router In Brokerage Game: A Cheaper Fix for Small Broker?
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Facing slower growth in its core business, a top order routing network is getting into the brokerage game.

NYFIX, a Stamford, Conn.-based vendor whose bread and butter is shuttling orders from large brokers to the floor of the New York Stock Exchange, has purchased a dormant broker dealer through which it plans to market order routing and clearing to small trading shops.

Soon to be renamed NYFIX Transaction Services, the new agency broker plans to commence business in early March, pending approval by the National Association of Securities Dealers.

As a broker, NYFIX will charge a per-share transaction fee rather than the monthly per-terminal subscription fee it now gets from such large clients as UBS Warburg and Lehman Brothers.

The pricing plan is expected to appeal to small broker dealers, hedge funds, and others that lack the volume necessary to justify the relatively expensive subscription. Because access is over the Web, these potential clients will avoid a steep upfront installation charge.

In going after small trading houses, NYFIX is positioning itself against large clearing organizations such as Bear Stearns, Pershing and Spear, Leeds & Kellogg. The big aggregators control the order flow of hundreds of small and mid-sized firms, offering them executions as well as post trade clearing.

To handle the clearing of its trades, NYFIX is working with Bank of America and another as-yet undisclosed financial firm.

"We're getting into the correspondent clearing game," said Andy Wilson, president of NYFIX Transaction Services. "But with our technology, pricing and value-adds, we'll be competitive."

A look at NYFIX's quarterly subscription revenues of the past four years shows a definite slowdown in year-over-year growth. Revenues were expanding at a rate of about 200 percent in mid-1999. Revenue growth subsequently dropped to about 130 percent in mid-2000 and 80 percent last year.

"That growth rate has been phenomenal," Wilson said. "It is slowing, but it's not stopping by any means."

NYFIX, which claims 100 large upstairs broker dealers and 100 $2 brokers as customers, says it has "pre-signed" about 20 smaller broker dealers, hedge funds, day trading firms, ECNs and online brokers for the new service.

What they will be buying appears to be the same as what the big boys are purchasing. The front-end will be less robust, according to Wilson, but the service still involves routing orders to an agent on the floor of the New York Stock Exchange. So, why operate as a broker dealer?

"We're really not doing anything drastically different than we did in the past," Wilson said. "But, as a broker, we can execute trades and charge transaction fees."

Executing Trades

Instead of "routing orders," NYFIX will be "executing trades." The distinction is subtle. Now, when NYFIX delivers an order for Lehman Brothers, it is routing it on behalf of Lehman. When NYFIX delivers an order for one of its new clients, it will route it on behalf of NYFIX Transaction Services.

The firm will not join the Big Board or any of the other exchanges. On the floor, it will be NYSE-member firm Bank of America's name that's given up.