Commentary

Jared Dillian
Traders Magazine Online News

Was it Worth It?

In this piece from 10th Man, author Jared Dillian discusses how the ETF revolution is less about ETFs and more about indexing; about how people have come to view stocks less as stocks and more as blobs of stocks.

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April 1, 2004

Spear, Leeds' Single Front-End

By Editorial Staff

Also in this article

  • Spear, Leeds' Single Front-End

When Spear, Leeds & Kellogg recently integrated program trading with single-stock trading on one platform, the move highlighted a quandary faced by brokers supplying customers with front-ends: Do they offer one system or two?

To some brokers, basket traders and single-stock traders are separate and distinct. Although it costs more, they are willing to maintain two systems. ITG, for example, offers Triton for basket trading; Radical for single-stock trading.

To other brokers, including Spear, Leeds, a division of Goldman Sachs, one system is the best approach. That's why it merged its TradeFactory basket trading front-end with its REDIPlus single-stock trading system. The reasoning? Basket traders want the ability to pull those stocks needing extra attention out of their baskets and work them separately.

Spear, Leeds' decision also speaks to the changes in its client base. When TradeFactory debuted in 1991, most of its users were broker dealers trading programs and index arbitrage strategies. At the time, TradeFactory was owned by TLW Securities, an electronic specialty broker.

Spear, Leeds bought TLW in 1999 in order to offer its clearing customers, mainly smaller broker dealers, access to TradeFactory. The move proved tonic for TLW as well. Between 1996 and 1997, the index arbitrage game had concentrated into the hands of fewer and bigger players, leaving TLW with a shrinking market for its services.

One year later, Goldman Sachs bought Spear, Leeds. The deal presented SLK with a whole new set of prospective customers for TradeFactory. Goldman Sachs is one of the top three prime brokers on the Street and hedge funds are serious basket traders. Some of Goldman's traditional buyside customers are looking at trading their orders in list form as well.

In sum, TradeFactory and Spear Leeds' REDIPlus system have been positioned to appeal to the buyside. The broker's broker still has plenty of sellside customers on its roster, but the directive from 85 Broad is to become buyside-friendly.

Europe is the fastest-growing market for the combined TradeFactory-REDIPlus product, where it appeals to both hedge funds and traditional money managers. Out of a total 70 users on the combined platform, 12 are in Europe. The rest are in the U.S. Also in the U.S. are 70 firms using TradeFactory as a standalone product.

Greg Tusar was one of the first three employees at TLW. He succeeded Tom L. Williams, founder of TLW Securities, last October, as the Spear, Leeds exec responsible for TradeFactory.

Traders Magazine Technology Editor Peter Chapman spoke with Tusar and his colleague Bryan Koplin about the integration of TradeFactory and REDIPlus as well as some brand new functionality being built into the integrated product.

Traders: What happened to the index market?

Tusar: As the markets got more efficient, that segment became dominated by larger broker dealers with a low cost of capital. [Profitability] became a function of your interest rate and access to capital. So, a lot of the smaller players in that strategy got squeezed out.

Traders: Then you no longer service index arb players?