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October 19, 2006

Vying to Become the Next ITS

By Peter Chapman

OES has sent two letters to the SEC criticizing the proposed set-ups of the Chicago and the National stock exchanges.

In July, it told the SEC that some aspects of the National's outbound routing program were "inconsistent with the definition of an exchange" as described in the Exchange Act.

Specifically, OES stated, the NSX's proposal placed the routing decision with the exchange and not its special purpose routing broker, NSX Securities. The SEC approved the proposal anyway and Lava won the business.

In August, OES informed the SEC that the Chicago's routing set-up did not incorporate the use of an exchange facility. The order routing services of the CHX's "specified third-party broker-dealer should be a facility of the CHX," OES stated. At presstime, the SEC had not approved the Chicago's proposal.

Broker-Dealers

OES isn't stopping with the exchanges. Although broker-dealers are not required by Reg NMS to prevent trade-throughs, many are taking the position they must shoulder the burden to comply with their best execution obligations.

Seeking to capitalize on that sentiment, OES has stepped up its marketing to broker-dealers. Its pitch is four-fold: (a) connectivity to all the exchanges, (b) smart-order routing, (c) a compliance service called Order Trail Recall (OTR) that captures quote and trading information and retains it for seven years and (d) membership on all 10 stock exchanges.

"Under Reg NMS," Barth says, "there is no excuse not to directly go and get the execution. The SEC is going to be putting a lot of pressure on broker-dealers that aren't connected everywhere. They will be put on the spot to defend why they are routing to one exchange or the other."

Typically, OES execs say, a broker-dealer may have connectivity to some exchanges, but not all. "It is very rare that most firms have all the market centers on a consolidated basis."

Even within the largest firms, Barth says, connectivity to market centers may be dispersed among various divisions.

DMA Trail

Order Trail Recall was developed by OES in partnership with John Paul De Vito, the head of a small direct market access brokerage called Bon Trade Solutions. The firm has been an OES customer for four years. "Under Reg NMS," De Vito says, "no DMA firm is going to be in business without something like this."

OES is not the only shop pushing a compliance snapshot. Routing vendor Selero markets a service called "Reg NMS Compliant Routing" in conjunction with a firm called Aleri Labs. Other DMA shops such as Lava Trading say they will have it as well.

OES competes against three different types of routing providers in its quest for broker-dealer business: niche shops like itself, including firms such as Belzberg Technologies and GL Trade; large clearing brokers; and telecom-like organizations such as TNS and BT Radianz.