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November 8, 2005

DMA Brokers Prep for Trade Through

By Peter Chapman

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  • DMA Brokers Prep for Trade Through

Broker-dealers engaged in direct market access trading are asking the Securities and Exchange Commission for help as they try to adapt their systems to the regulator's new trade-through mandate.

"We still need some guidance on the interpretation," said Tal Cohen, an Instinet executive and member of the Security Industry Association's trade-through rule committee, "and a better understanding of the exemptions."

Broker-dealers engaged in direct market access trading are asking the Securities and Exchange Commission for help as they try to adapt their systems to the regulator's new trade-through mandate.

"We still need some guidance on the interpretation," said Tal Cohen, an Instinet executive and member of the Security Industry Association's trade-through rule committee, "and a better understanding of the exemptions."

The trade-through rule, part of a package of rules known as Regulation NMS, requires market centers to ensure all orders are filled at the best possible price. Yet, while the burden of compliance technically falls on the market centers, broker-dealers are claiming the onus for themselves.

In fact, they believe that by taking on that responsibility they gain an opportunity to stand out from their peers and win business. "It is a competitive issue between broker-dealers as much as it is a regulatory issue," Cohen said. "As a broker, you still want to achieve best execution."

One way to do that is to beat the other guy to the quote. Milliseconds count, brokers say, so it is better to scan the market yourself rather than ship the order to an ECN and let the ECN check.

Most DMA providers are upbeat about their prospects under the new trade-through rule, which is slated to go into effect next June, as they envision a new wave of electronic trading taking hold.

"There is going to be more fragmentation and a real need for direct market access platforms and smart order routing," noted Joe Wald, chief executive of EdgeTrade, an agency broker. "We are in a tremendous position."

To be competitive in the new environment, sources say, brokers are going to have to be able to scan multiple markets for the best prices; access those prices quickly; and store reams of data to prove compliance with the rule. Those players with speedy and sophisticated direct market access platforms built with so-called smart order-routing technology will thrive.

Most players Traders Magazine spoke to do not expect Reg NMS to overly tax their resources. They already have the necessary infrastructures in place as they've been offering electronic trading in the Nasdaq markets for several years. They do not foresee significant overhauls to their platforms.

"We will definitely be making changes and tweaking our system," noted Wald. "But this will not be a major effort for us. We have a full infrastructure in place."

Another electronic trading exec who works with DMA providers agrees. "Anyone who is doing any kind of smart order routing is already reading all the quotes and making the decisions," noted Eric Goldberg, chief executive of Portware. "It's possible the decision process will change slightly, but that should not require too much modification."

Clarification