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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July 27, 2005

At Deadline

(Traders Magazine, July 2005)

LAVA Jilted *The JP Morgan-Lava nuptials are off. Lava has been jilted. The large bank backed out of an agreement with Lava Trading to install its ColorPalette order management system. The deal began to unravel last year after Citigroup, JPMorgan Chase's arch-rival, acquired Lava. "We have chosen another vendor," says JPMorgan exec Emily Portney. JPMorgan currently uses SunGard's BRASS for Nasdaq order management. Other top players in the space are Royal Blue and NYFIX. For Lava, the JPMorgan purchase was, at the time, its largest and a plum in its quest for market share. Lava, best known for its DMA platform, is a relative newcomer to order management. Most of its customers are small broker-dealers. It has signed 10 for ColorPalette, according to president Rich Korhammer, and has another 10 in the "pipeline." Piper Jaffray is the largest user of ColorPalette, sources say, and UBS is considering the system. UBS has reportedly installed some Lava OMS components. Other ColorPalette users are Needham & Co. and ThinkEquity. JPMorgan Inks DMA Deal *JPMorgan is the latest big financial group to acquire a direct market access platform. The large investment bank bought Neovest Holdings last month in order to supply its buyside customers with electronic trading and analytic capabilities. Up to now, JPMorgan has only sponsored third-party DMA platforms. Behind the Neovest deal, according to JPMorgan exec Emily Portney, was the desire to "deliver our content more seamlessly and quickly to clients." For JPMorgan, "content" is algorithms, optimization models and other analytic tools. Ownership of a DMA platform gives JPMorgan more flexibility, adds Portney. The bank eliminates dependence on the "release cycles" of third-party providers and the flexibility and scalability of their platforms, she notes. JPMorgan's Neovest deal is the latest in a string of acquisitions of DMA platforms by large banks and brokers. Citigroup, Bank of America, Knight Capital Group and others have all bought systems in the past two years. Proprietary Soft Dollars Appear OK *An SEC official said the use of soft dollars can inflate commissions and present a potential "conflict of interest," but regulators will not require unbundling. So said Annette Nazareth, the head of the SEC's Division of Market Regulation. She recently gave an address to the New York Stock Exchange's Regulation Conference. It is expected to be an annual event. Nazareth noted that the SEC will likely approve new soft dollar rules later this year. The SEC has a soft dollars task force that is expected to report its findings sometime this summer. Many in the soft dollar industry are predicting that the SEC will increase documentation of soft dollar expenditures. "We seek to impose greater accountability," Nazareth said. "But we do not believe that it is sensible, in considering soft dollars, to differentiate between proprietary and third party soft dollar arrangements." She said that both third-party and proprietary research can be "equally appropriate" for soft dollar arrangements.