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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March 1, 2004

Electronic, 'Unconflicted' Brokers

By Peter Chapman

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  • Electronic, 'Unconflicted' Brokers

Is This Niche Trading Business Becoming Crowded?

When the direct access broker Neonet purchased competitor Lexit Capital last year, the deal underscored the drive by small tech-savvy players to capture institutional order flow. But with direct access services now becoming standard fare at the top full-service and agency brokerages in the U.S., is there still room for these upstarts?

The Lexit deal gave NeoNet, best known in U.S. circles for cross-border trading, a platform on which to conduct a direct access business in the U.S. Previously, the firm relied on a link to the Brut ECN for access to the U.S. markets.

With the deal inked, NeoNet replaced its head of U.S. operations, Peter Gaffney, with Lexit's chief executive, Peter Kearns. Kearns is now spearheading NeoNet's push into domestic direct access. "We are going after the U.S. market," Kearns said. "We have access to all the ECNs and SuperMontage. We have partnered with a lot of order management systems vendors."

Neonet is one of several small shops to set up an electronic trading business in the past four years with hopes of capitalizing on an historic convergence of trends in the U.S. stock market.

Colliding all at once has been the complete electronification of the Nasdaq marketplace; the reduction of the minimum trading increment to a penny; and stepped up scrutiny by the buyside of its trading performance.

These three events have opened the door for technologically sophisticated trading houses to pitch cheap trades to traditional money managers, plan sponsors and hedge funds using computers. Direct access trades can range from a penny to two cents per share. That compares with three, four and five cents for executions requiring human expertise.

Among the newcomers making their mark, using ECN aggregation' software, are such firms as NeoNet, Pulse Trading, White Cap Trading, EGS, Electronic Specialist, EquityStation, Terra Nova Institutional, UNX, Vie Financial and Paravane Partners. Almost all are staffed with execs from the formerly fringe world of electronic trading. All are agency brokers promising "unconflicted" executions. That usually means no banking, no proprietary trading and no market making. It can also mean no research and no shopping of orders.

The group is not the first to tout itself as an extension of the buyside trading desk. Agency brokerage is an old game with entrenched players such as Instinet, ITG, Bank of New York Securities to name a few.

So, the competition is stiff. And just about every institutional brokerage is either installing or considering the installation of direct access technology. Examples abound.

CAPIS, of Texas, licensed Sonic Financial's front-end, branding it SlingShot. Nutmeg Securities in Connecticut recently released eNutmegdirect. SunGard brought daytrading shop Andover Brokerage. ITG, which practically invented the direct access business in the early '90s, took a stake in front-end vendor Radical.

More Players

Agency brokers, which have traditionally operated on the edges of the market anyway, aren't the only players offering automated fills. Of greater threat to the electronic upstarts are the bulge firms which control most of the order flow by virtue of their research, IPOs and soft dollars. Nearly all are establishing agency-like electronic groups within their cash equity departments.