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December 1, 2002

Trying to Outflank Competitors

By Peter Chapman

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  • Trying to Outflank Competitors

Will the Big Board Foil the NYFIX Strategy?

Let the games begin! The New York Stock Exchange has thrown open its doors to connectivity vendors of all stripes in a bid to counteract what it sees as hostile moves by its largest network supplier.

This spring, connectivity powerhouse NYFIX furrowed brows on the floor and in the executive suites of the Big Board by acquiring a competitor and simultaneously setting up a broker dealer subsidiary.

It now controls two of the most popular order routing conduits to the floor and is positioned to compete against its floor customers for commission revenue.

Rumors are also flying that NYFIX wants to buy a NYSE floor broker of its own, a move that would place it in direct competition with many of its customers. A move like this is not without precedent. Arch rival SunGard operates an independent floor brokerage at the NYSE. NYFIX is mum on the matter though, saying only: "We consider many things."

The moves by NYFIX, say observers, are responsible for swinging the Big Board into action. The Big Board is introducing, through vendor fairs and private forums, alternative vendor offerings to the traders most affected - independent floor brokers.

Tradeware, royalblue, OM, Davidge, and a several others have been trouping through the hallowed halls of the New York this year, hawking their wares to the small trading shops.

"Brokers are looking for alternatives," said Lou Pastina, who's in charge of point-of-sale technology at the NYSE. "They don't want to be sole-sourced. They're asking themselves: What would happen if my competitor bought that system? Then I would be sole-sourced.'"

The flurry of new offerings follows NYFIX's move back in April when it purchased Javelin Technologies. Javelin, which is best know for its FIX engines, also runs an order routing system called FIXchange.net. The system is used primarily by independent floor brokers to connect to their buyside customers to facilitate direct access business.

FIXchange.net both complements and competes with NYFIX's own sprawling network that connects the buyside to block desks and block desks to the floor. It is the dominant order flow delivery mechanism at the New York, moving hundreds of millions of shares a day.

At the same time NYFIX was dotting the "i"s on the Javelin deal, it was registering a broker dealer subsidiary with the NASD. NYFIX Transaction Services, as it's called, allows NYFIX to charge some of its smaller customers for connectivity on a more lucrative commission basis.

Those with the most to lose from NYFIX's activities are the burgeoning cadre of direct access brokers. At least half of the approximately 250 independent floor brokerages now offer their services directly to the buyside. Until recently most worked exclusively for the large commission houses. But the growing interest by the buyside in cutting costs - both explicit and implicit - has led many to conduct business with the johnnies on the spot, bypassing the block desks for certain trades.

Connectivity

Many of those direct access brokers need electronic connectivity to their new customer base. Since 2000, the vast majority secured that via Javelin's FIXchange.net line.