Robert Hegarty
Traders Magazine Online News

Reinventing Trading Venues: How AI Can Help Create a More Efficient Market

In this whitepaper shared with Traders Magazine, the Hegarty Group examines how artificial intelligence and machine learning can help traders execute more efficiently.

Traders Poll

If Members Exchange (MEMX) gets SEC approval and launches, do you think it will force downward pressure on market data fees?

Free Site Registration

April 30, 2002

Back Office Clearing Direct? Firm Brings Clearers Through the Front Door

By Brian O'Connell

Also in this article

  • Back Office Clearing Direct? Firm Brings Clearers Through the Front Door
  • Page 2

Have clearing brokers finally discovered the Holy Grail? A private label, front-end software package is offered as solving their direct access execution problems.

The provider, Trade Route Direct, claims its product is a necessity. "A real-time front and backend risk management system is no operational luxury," said John Paul DeVito, business development officer at Trade Route Direct, a small New York-based firm employing about 15 people, including three programmers, two network engineers and three support staff. "Direct Access is a necessity in clearing," DeVito added.

Many clearing brokers agree. Indeed, Trade Route Direct says it has two "firm commitments" from potential correspondent clearing firm customers. Fiserv Securities is rumored to be one. Trade Route Direct is also in talks with five more clearing firms, according to Trade Route's chief technology officer Vic Tartaglia.

Trade Route, a privately-owned service provider approved by the National Association of Securities Dealers, handles some 7,000 trades each day (65 percent of them on Nasdaq and most of them institutional sized orders). It formed its broker dealer in 1992. Although Trade Route acknowledges the existence of other direct access platforms, it touts its own horn as unique. "Trade Route Direct is focusing on the full picture of the trade, not just trade execution but also backoffice, risk management and straight-through-processing issues," DeVito said.

Whatever the truth, Trade Route Direct does demonstrate the growing importance of direct access in the securities markets.

"There is a value chain here," said Fritz McCormick, an analyst at Boston-based Celent Communications. "We see sellside firms showing interest in direct access technology while clearing firms will want to accommodate them with a value-added service."

Until recently, Trade Route has been busy marketing its SDA, or Simple Direct Access software trading solution, to broker dealers looking to enter the direct access trading market. That software enables users to electronically route orders to all the big ECNs, including Archipelago, BRUT, Redibook, Island and Instinet. Users can also transmit orders to the New York Stock Exchange's DOT system, Nasdaq's SuperSoes and SelectNet trading networks, as well as to the American Stock Exchange.

When Trade Route principals realized that there was a backend product they could offer as well, the marrying of direct access technology to backoffice clearing systems began to make more sense. "Let's face it," DeVito said. "Regulatory responsibilities like T+1 and straight-through processing are now prerequisites. Clearing firms see them as potential profit centers but aren't sure how to leverage the technology needed to maximize revenues."

The opportunity is there because financial institutions face major obstacles in achieving next-day settlement. This problem includes the current lack of real-time connectivity, the diversity of communication protocols and standards, and the inability to seamlessly enact a complete STP environment.