Commentary

Tim Quast
Traders Magazine Online News

We're All HFTs Now

In this guest commentary, author Tim Quast looks back at the history of HFT and how the market has evolved to where many firms now fit the definition of high-frequency trader.

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February 1, 2004

Arsenal for the Mini Marts

By Peter Chapman

Also in this article

  • Arsenal for the Mini Marts

A Vendor Gears Up for Even More Internalization

A designer of trading platforms for small stock markets is betting its future on a growing Wall Street trend: internalization.

Elind, a vendor from Bangalore, India, got its start automating regional stock exchanges in the sub-continent. But now it sees potential in the U.S. to create mini-stock exchanges within large brokerages and money management firms.

"We see significant opportunities in the North American market and others for technology to internalize order flow," said Greg Johnston, Elind's new chief executive. "It's what brokers and even the large institutions are looking for in order to minimize their costs."

Johnston, formerly a marketing exec with OM Group and a one-time trader, became Elind's top man just this past December. The hire of an American to run Elind speaks to the seriousness with which the Indian company is taking the American market. Although most of its staff is located in India, Elind opted to relocate its headquarters to New York and recruit much of its senior management from the U.S.

Elind still markets its technology to small bourses around the world. But it expects most of its growth to come from sellside and buyside shops looking for technology to aggregate order flow from their various desks and departments.

In bringing together orders from disparate order management systems, firms hope to cross or trade against more of their flow. That way they can save money by eliminating fees charged by market centers and also, potentially, provide a value-added service to their customers.

An exec from one large house that is building a crossing engine put it this way: "The goal behind this is to get clients to send us more orders because they get price improved. And it helps us with our cost infrastructure because we don't have to send the orders to the floor. We cut out some of the fees."

The practice is not new. Some of the behemoths of the industry, including Knight Trading Group, Schwab Capital Markets, State Street and Barclays Global Investors, have been matching order flow internally for years.

But with margins on stock trading still poor due to the market slump and the advent of penny ticks, others are following their lead. Most of the largest ten or fifteen sellside trading houses are thought to have crossing engines in various stages of development.

The market for such technology does appear limited though. "Our order flow isn't consistent enough," said Nick Karos, head of Nasdaq trading at mid-tier firm Piper Jaffray.

Even Bear Stearns apparently has no plans to invest in the technology. Aldo Parcesepe, co-head of Nasdaq trading, says it's "silly." The probability that a buy order and a sell order in the same security will hit the system at the same time is low, Parcesepe explains. And typically, at any point in time, there are more buyers than sellers or vice-versa in a given security, further reducing the opportunities for a match. "What is the probability?" Parcesepe asks rhetorically. "Ten percent?"

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