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Tim Quast
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We're All HFTs Now

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April 16, 2007

Pipeline Shuts Door on Third-Party Broker Algos

By Nina Mehta

Early last month, Pipeline Trading Systems terminated buyside access to its block crossing platform via third-party broker algorithms.

Fred Federspiel, Pipeline's founder, told Traders Magazine that broker algos "are under a financial pressure to route elsewhere-not to Pipeline." He said buyside customers are hurt by the "conflict" between their desire for large executions and brokers' financial incentives.

Brokers charge customers a single per-share price for executions via their algos. Among dark pools, Pipeline was the most expensive destination for broker algos.

About a dozen brokers offered customers access to Pipeline through their dark-pool algos. Those algos, which typically submit orders to a number of dark venues, had to meet the same giant minimums that Pipeline's customers met when they accessed the block crossing system directly.

In an email to customers, Federspiel explained that over the last several months customers had begun getting inferior access to Pipeline via broker algos. He wrote: "New restrictions by major algorithm providers have created a 63 percent drop in algorithmic executions on Pipeline, even while overall Pipeline volumes have risen by 10 percent in the same time frame. Simply put, algorithmic access to Pipeline no longer approximates direct access."

Pipeline users who access the platform directly are "almost twice as effective" as algorithmic users at finding large natural liquidity, Federspiel wrote. He added that Pipeline's "large order size and firm trading commitment present significant challenges" for brokers.

Federspiel told Traders the dropoff in algorithmic executions occurred after Pipeline declined to lower its minimum order size and its price.

Brokers can still access Pipeline directly or through their own dark algos, Federspiel said. Buysiders can access Pipeline directly or through direct-market-access platforms such as BNY ConvergEx Group's Sonic and Goldman Sachs's REDIPlus. Those platforms provide broker-sponsored access to Pipeline, but customers pay the fees associated with those executions.

Federspiel stressed that what has changed is that "algorithms-where the benefit goes to the buyside and the cost to the broker-can no longer access Pipeline."