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August 31, 2002

Direct Access in Hard Retail Times

By Peter Chapman

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A New Turn for Hedgies and Money Managers

An early bird in the direct access game is beefing up its system to appeal to institutional traders.

Technology vendor Townsend Analytics is augmenting its pioneering market data and direct access system - RealTick - with new features for hedge funds and other money managers. The changes come amidst a prolonged slump in its core retail market.

The move to the buyside was highlighted recently by Townsend's deal with Instinet. The big ECN gave Townsend the right to broadcast and grant access to every single quote on its book. Previously, the vendor could only offer Instinet's best prices.

Now, with Instinet on board, RealTick users can trade against the full books of five of the top six ECNs. That's a big chunk of liquidity.

The Instinet deal was just one of several buyside-friendly additions to the RealTick platform over the past year or so. Last year basket trading was added to satisfy the hedge funds. This year saw the debut of market data from the New York Stock Exchange's OpenBook and Institutional Xpress initiatives. The pricing data gives block traders a better picture of liquidity on the Big Board.

Also, this year, Townsend opened up the RealTick order management system to outside systems. Quantitative traders using black boxes to make their trading decisions can now program those devices to automatically send order instructions to RealTick. That eliminates the manual data entry.

More services are on the way including direct access to foreign markets and new order types built especially for Arca-Ex, the new stock exchange owned by sister company Archipelago.

Townsend sales exec Jeff Brown says the future of direct access at the institutional level is bright. That's because the technology can do everything a full-service trading desk can do, he adds. "Most of the value proposition provided by manual order handling by brokers is incorporated into electronic direct access platforms," he claimed. "By that I mean order types like hiding, reserve, and staged orders."

SOES Bandits

RealTick won its stripes in the equity market of the mid-90s when it became the weapon of choice among the so-called "SOES bandits." The rapid-fire retail traders made huge profits leveraging RealTick's connection to Nasdaq's SOES to pick off the quotes of slow-to-update market makers. The group morphed into daytraders, sticking with RealTick to play the bull market via ECNs.

But retail is now in the dumps. So both Townsend and sister company, Terra Nova Trading, a brokerage which supplies customers with RealTick, are moving up the food chain. Last year, Terra Nova launched an institutional division that is now staffed with 15 employees operating in Chicago and Denver.

Servicing the pros is not new at Townsend though. Its service bureau has always found favor with some large program and proprietary desks. The vendor counts Goldman Sachs as a client, for instance. The big boys use RealTick mostly for market data, though, and not executions.