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August 31, 2002

Nasdaq's ACE in the Hole

By Desmond MacRae

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How the Little Guy Is Striking Back

Competition in the order management business could become more intense because of improvements in a Nasdaq product.

The reegineered product, known as ACES, or the Advanced Computerized Execution System, is available free to order delivery firms. And it gives users more control over orders routed to them.

ACES, say Nasdaq executives, has come a long way since it was introduced in 1988. ACES links all Nasdaq participants. Indeed, Nasdaq has turned the product into an order delivery system for dealers, a system which is especially useful for small firms.

Today, small volumes from individual firms are not large enough to support the cost of installing BRASS, the SunGard Trading Systems' product, say some trading pros. A majority of Nasdaq orders are now routed over BRASS.

Execution Function

ACES has changed over the years. An automatic execution function was dropped in 1998 following the introduction of the order handling rules. Those rules encouraged Nasdaq participants to manage an open order file internally rather than on ACES.

"We removed the Auto-ex functionality within ACES making it the order delivery system that it is today," said Ron Lipof, an ACES product manager for Nasdaq in New York. (The anomalous "E" for execution, however, is still used, because the name ACES was trademarked. It is also used because the name is familiar to the some 140 firms that use the system.)

At the same time Nasdaq allowed routing in any stock, while providing market makers with greater control. This expanded function permits users to be selective about which customers can send them orders. Thus, there is improved electronic control of relationships.

There are several reasons why ACES could prove a hit, according to Nasdaq officials. The improvements have kept pace with evolving technology. ACES is said to be reliable. And, for its order entry users, it is free. "If you enter an order into an ECN, there is usually an access fee, but order entries into ACES are free," Lipof explained. "It is the market maker side that pays."

"This is because market makers thrive on order flow, but they will be selective about who they will pay for," he added. "We don't usually have day traders putting their orders on ACES."

Day traders are said to prefer ECNs because of the fast execution speed some of them provide. For broker dealers, particularly the big household names, there are three principal ways to get Nasdaq-listed stock orders to each other: via telephone, direct links like ACES, or via other routing networks. A broker dealer will usually have "profiles" programmed in his proprietary order management system, or a system purchased from BRASS, or else another vendor.

Agency [retail] orders for Nasdaq stocks that firms don't make markets in, or that they send to preferred market makers, typically go through ACES.

Allocate Orders

Brenda Blackard, head of equity trading for Davenport & Company in Richmond, Virginia, explains how her firm allocates orders and uses ACES. "We can go in from my market marker side in stocks that we make a market in, or through our trading system that lets us set limits on what we want," she said.