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September 30, 2002

Bear Market Technology

By Don Camillo

Traders, facing a bear market in a climate of decimal pricing and strict order handling, must work harder to survive.

Suddenly, cost efficiency and technology savings are critical to a firm's bottom line.

A firm must economize on its fixed, as well as leased and variable technology overhead costs. Market making firms should wring generous savings out of non-core operational areas, such as outscourced services.

These areas primarily include networked communications, in particular the Internet and private networks; core trading, order management, and routing platform technologies with open architecture and non-proprietary designs, front-end tools; and backend clearing, settlement and record keeping systems.

For example, at BrokerageAmerica, a variety of legacy private and public communications networks that connect market participants constitute the basic frame of the communications order messaging infrastructure. There is also a mass of fragmented independent, point-to-point circuits.

Firms like these, which leverage shared technology to maximize efficiency, should in the future expect a proliferation of new communications alternatives. It will boil down to more efficient and secure Web-centric virtual private networks, and shared FIX compliant high bandwidth communication networks. It will mean more widespread utilization of universal FIX interface adapters and messaging management and control technologies.

Essential service bureau trading platforms with widespread features will become the popular choice because of the increasing competitive drive to cut sunk internal IT capital, development, and maintenance costs. Platforms with canned, ready-to-wear interface development schemas with the major backoffice systems, will tend to dominate.

This integrated service package should evolve into a full suite of efficient tools, facilitating market participation and unique/tailored trading objectives intuitively. There should be superior liquidity transparency and price discovery. There should be associated real-time risk management and analytical data management tools. This package would include marked-to-market real-time p&l and position/balance data, a package which should nicely dovetail with the architecture of these platforms. In addition, flexible and dynamic algorithms, to support execution quality and operational requirements in features such as auto-ex, position firewalls, automatic price improvement, and customer limit order display, should become the standard.

Front-end application service provider features, supporting retail and middle market channels, need to be integrated with core trading and backoffice platforms. They need to be integrated to facilitate real-time account information, market data, order vetting, and transactional capabilities. The integration and synchronization of general ancillary applications and database structures is of paramount importance to the development of a rounded enterprise-wide platform. These applications and structures include portfolio allocation and sales trading commission accounting programs, settlement instruction and security master databases, market data applications, and ECN facilities.

Internally, a near-paperless data infrastructure built around internal shared drives and data networks, shared organizational and communications tools, and document digitization, serves to further streamline the management of data. It helps to reduce personnel and data communications overhead, while increasing the effectiveness and integrity of data distribution processes.

The trend toward convergence and centralization of price and liquidity interest data, and associated interactive transactional capabilities, will continue to be a driving force. Here will be the wave of the future: An open, completely digital central limit order book - facilitating all listed and OTC equity market order activity. Under this scenario, there will also be general market participant order-related messaging communications built around activity with negotiated and/or special handling arrangements.

Don Camillo is president and chief operating officer, BrokerageAmerica.