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January 1, 2004

A Bond System for Stocks

By Arthur Goldgaber

Also in this article

  • A Bond System for Stocks
  • Page 2

Can eSpeed Pull It Off in the Equity Execution Business?

Can another institutional stock trade execution system really succeed? At first blush, one firm with promise seems like an odd fish: eSpeed, the fixed-income business spun out of trading firm Cantor Fitzgerald.

In November, eSpeed launched an equity trading and routing front-end platform, one of four products recently introduced by the firm. The others are in foreign exchange, interest rate swaps and mortgage-backed securities.

But the equity platform, eSpeed Equities, is trying to squeeze itself into a scrappy industry dominated by big players such as Instinet and Spear, Leeds & Kellogg. Despite the entrenched competition, eSpeed CEO Howard Lutnick is undeterred.

Lutnick says the new system, "will provide equity traders with a superior order routing system that will provide the type of technological expertise, liquidity, neutrality and efficiencies that have helped transform the fixed-income market in the past four years."

Some pros doubt there is room for eSpeed. "The equities space is already crowded and very commoditized," according to industry analyst Miranda Mizen of consulting firm TowerGroup.

eSpeed Equities, nevertheless, launched its maiden voyage with certain advantages. Another analyst, Richard Repetto of Sandler O'Neill & Partners, notes that, "at the very least eSpeed should be able to tap Cantor's equity division for order flow."

Indeed, eSpeed describes the product as a low-cost, intelligent order execution platform. It also offers equity traders multiple points of entry and simultaneous electronic access to stock exchanges, market makers and ECNs.

The target customers are buyside firms and hedge funds. The company will initally pitch mid-sized players. Twelve companies tested a beta version.

But building market share is difficult. Mizen says that North American companies spent about $655 million in 2003 on electronic order routing and other equity trading technology, a market she estimates will grow about 3-3.5 percent in 2004. Because of the segment's sluggish growth, companies typically must expand by eyeing the space occupied by rivals.

Still, the marginal costs for eSpeed are "minimal," notes Repetto.

Joseph Noviello, eSpeed Chief Information Officer, said the product also has several distinct features: "It will allow traders to route orders to their choice of ECNS or global exchanges from a single interface, which we believe offers efficiencies over other products." Noviello acknowledges the challenge eSpeed faces, but he adds that it has unique functions that allow its customers to tap hidden or unpublished liquidity reserves.

The system also enables customers to access all undisplayed bids and offers in multiple markets in a single sweep. This means customers can potentially achieve significant price improvement in OTC and listed stocks, according Noviello.

Intuitive System

One trader who tested the system said entering orders is "easy and quick." That contrasts with other systems that are difficult to master and not as intuitive, he said.

"In this game, it's often a matter of tenths of seconds whether or not you are able to buy or sell something at a particular price, so ease of use does make a difference," said the trader, who declined to be named.

Noviello says that eSpeed's tools use algorithms developed by the firm to seek executions based on the preferences and strategies recommended by traders.