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July 31, 2002

Dealing in a Fee World

By Editorial Staff

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It used to be pretty simple. Nasdaq trades hit the dealer's book, piled up and then - from time to time - were priced and allocated to clients' accounts.

But now the business model has changed: Fee-based trading has replaced net trading on a huge portion of Nasdaq business. Market makers are more likely to represent customers in the market than trade with them. Dealers are charging commissions, or commission-equivalents,' for the service rather than buying at one price and selling at another.

That means some fills can't flow through their inventories anymore. Agency executions must go directly into a customer's account or a temporary holding account. The new pricing scheme also involves four different order categories - agency, riskless principal, risk principal and net. A trader may find himself working orders for several customers in any or all of these capacities.

Today the allocations process on institutional trades is complex. It takes a computer to sort out all the parts. That's where vendors such as London's Royal Blue come in.

Royal Blue recently rebuilt its order management system, Fidessa, to accommodate the new reality of Nasdaq trading. Fidessa - considered the BRASS of the U.K. - now knows both how the trader is working the order and how the executions should be allocated. That frees the trader to focus on finding liquidity. The computer handles the fills.

Royal Blue dominates the desktops of the U.K. dealing community in the same way as SunGard Trading Systems and BRASS dominate U.S. desktops. Now Royal Blue wants a piece of the U.S. pie as well. In the states for about five years, the vendor is slowly, but surely making headway in the U.S. among institutional brokerages. Among its half-dozen or so clients, it counts Bank of America and SG Cowen, and recently won the business of SunTrust Robinson Humphrey. It is the only real threat to King BRASS at the moment, according to industry observers.

Fidessa may be closing in another big account. Last year, Merrill Lynch picked Fidessa for its European and Asian trading floors. The country's biggest market maker is now working with Royal Blue to determine the suitability of installing Fidessa in its Nasdaq trading operation, according to the vendor.

Traders Magazine technology editor, Peter Chapman, sat down with the Royal Blue team to learn what Fidessa offers Nasdaq market makers doing business on a fee basis. The executives are Joe Chafatinos, executive vice president of new business development; Mark Ames, chief technology officer, Martin Hakker, executive vice president of marketing; and Steven Garceau, a senior implementation specialist.

Traders: Are you seeing more fee-based trades done on a riskless principal or agency basis?

Hakker: Mostly agency.

Traders: Agency executions are not supposed to flow through the trader's inventory.

Chafatinos: That's right. Once the trader decides he wants to trade on an agency basis, those trades cannot hit the principal account.

Traders: Those executions must flow into an omnibus account?

Chafatinos: Correct. The omnibus is an interim account. A trader accumulates into this account.

Traders: Do all trades enter the omnibus account?