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September 30, 2004

Building the Better Mousetrap?

By Peter Chapman

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  • Building the Better Mousetrap?

The approaches to stock trading in these three systems are all radically different. Yet the inventors of each have at least one thing in common: They want customers, financing and partners.

The trio all claim to have built better mousetraps. They are Fred Federspiel, formerly a scientist with the Los Alamos National Laboratory, Sam Balabon, an inventor and entrepreneur from Texas, and Chris Keith, former chief information officer of the New York Stock Exchange.

Federspiel is promoting Pipeline, a not-so-dark alternative trading system. Keith is offering PDQ, a sophisticated smart routing system. Balabon is out there with Deep

Liquidity, an ATS that freezes time. All three have patents pending.

Half-Blind Box

Fred Federspiel has been down this road before.

Federspiel's company, e-Xchange Advantage, developed block trading software called Liquidity Tracker that it licensed to Nasdaq in 2002. The technology was meant to facilitate trades between Nasdaq dealers, but never caught on. Nasdaq scrapped Liquidity Tracker last year as part of its reorganization.

Federspiel, a one-time rocket scientist at Los Alamos, says he learned from that experience and contends he has now come up with a can't-lose alternative trading system. The technology called Pipeline is owned by broker dealer Pipeline Trading System and run by Federspiel and former Nasdaq president Al Berkeley.

Pipeline is a half-blind box. On the trading system spectrum, the technology falls somewhere between the open books of the ECNs and closed books of such ATSs as POSIT. Traders can't see the orders in Pipeline as they can with an ECN. But they do have some inkling about their nature. With some ATSs, no one knows what's inside unless they execute.

"Pipeline addresses a need in the market that has come about because of decimalization," Federspiel says. "That's the drying up of liquidity and the ease of stepping in front. It's become more and more critical to get some size done before the predators can figure out what you are up to."

Using the ATS appears relatively straightforward. Trader "A" places a "reasonably priced" order of at least 25,000 shares in the system. A light goes off on Pipeline's "Block Board," signaling to subscribers there is liquidity in the name. The side of the market on which the order lies is not disclosed.

If Trader "B" has an interest in the security, he inputs his own priced order of 25,000 shares or more. If he is on the right side of the market and the two contras are close on price, an execution occurs. If not, Trader "B" gets a "nothing done."

About 700 stocks are available for trading in Pipeline. Between 75 and 80 of the most liquid names - those that trade over five million shares per day - require minimum order sizes of 100,000 shares. The rest require 25,000.

The big minimums are intended to discourage gaming. The execs at Pipeline maintain that few traders are willing to risk a 25,000-share trade simply to get a peek at others' orders.