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August 31, 2002

A Speedy New Execution Player?

By Peter Chapman

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  • A Speedy New Execution Player?

Sonic Trading Is Ready for a Dog Eat Dog World

Another direct access firm is courting the pros. Sonic Trading Management

is launching a new division called Sonic Financial Technologies. It will house its growing business servicing institutional traders on both the sellside and the buyside. The vendor's selling point is speedy Nasdaq and listed stock executions via its trademarked SonicStorm direct access system.

"Milliseconds matter," said Joe Cammarata, a Sonic co-founder. "When there are only a limited number of shares being offered whoever gets there first is going to get the stock. It's dog eat dog."

Cammarata claims a speedy SonicStorm ensures at least 35 percent of users' orders are price improved, or filled better than the national best bid or offer.

Depth of Book

The Sonic service includes full depth of book of five ECNs; basket trading; smart order routing; real-time compliance and risk management; institutional order types; and direct access to all 11 ECNs, SOES, SelectNet, and the exchanges.

The 40-person Sonic is a relative newcomer to the front-end game, starting out life in late 1998 as a broker dealer for daytraders. That segment of the market collapsed along with the bull market in early 2000, but by then Sonic was gaining a following among hedge funds.

In late 2000, it made the decision to set up a service bureau and license its technology to broker dealers and hedge funds. The broker dealers were generally small daytrader shops looking to save money on infrastructure. The hedge funds were delivery-versus-payment customers introduced by their clearing firms.

Rather than a flat, one-time license fee, however, Sonic stuck to its commission-based origins. Rates were $2 per 1,000 shares. Customers paid every time they placed a trade.

The catalyst that shot Sonic into the institutional space was the successful debut of Lava Trading. Last year, Lava became the darling of the dealers when it brought ECN depth-of-book aggregation and direct access to the upper echelons of Wall Street for the first time.

While Cammarata applauds Lava's success, he maintains Sonic has always offered full depth of book. "Sonic has been aggregating ECN quotes and full books into their system since early 1999," he said. Sonic now broadcasts and offers access to every quote on five ECNs: Instinet, Island, Archipelago, REDIBook and Brut.

Customer Base

Sonic's customer base has evolved. Twelve months ago, according to Cammarata, the mix was 95 percent active trader and five percent institutional. Today, it is 65 percent institutional and 35 percent active trader.

"Active," as defined by Cammarata, however, means hedge fund and not retail. "Institutional" means traditional buyside and sellside. Cammarata, an alumnus of Datek Online, says Sonic has never serviced the run-of-the-mill daytrader. Individuals have generally been sophisticated ex-Wall Streeters.

Below are some order types and other features.

Hiding and Chiseling