Commentary

Robert Schuessler
Traders Magazine Online News

A Smarter Monkey

In this contributed piece, TIM noted that some traders do better than others when using data that has been run through certain analysis - that is, have used some form of machine learning to assist them.

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In his first public speech, SEC Chair Jay Clayton deviated from his prepared remarks and offered his own "off the cuff" comments on market issues. Do you like this change of pace?




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June 4, 2007

LavaFlow ECN Taps Into Lava Base for Liquidity

By Nina Mehta

The newly launched LavaFlow ECN aims to build liquidity by attracting users of Lava's existing suite of technology products.

Specifically, the ECN, part of the giant Citi group, is going after broker-dealers that use Lava ColorBook, the popular and respected smart router, and other Lava products, including its sellside order management system.

Most of LavaFlow's 30-plus subscriber broker-dealers are Citi customers using Lava products. "We're focused on the current Lava customer base," said John Procopion, director of sellside execution services in Citi's electronic trading solutions group.

Citi is a "big supporter of our business," Procopion noted. He declined to say what percentage of the liquidity added to or removed from the system came from Citi.

LavaFlow, which was designed to be Regulation NMS-compliant, launched in January. In the first few weeks of May, the ECN traded about 4 million shares per day.

Lava ColorBook is effectively the gateway to LavaFlow ECN. In addition to reserve and hidden orders, the ECN "supports every order type available through ColorBook, some natively on the ECN and some through ColorBook," Procopion said. This gives ColorBook customers greater flexibility in how they execute orders, he said, although they do not get preferential treatment on the ECN. The smart router is also used to route out to other markets.

To encourage customers to rank LavaFlow high on their routing tables, the ECN launched an innovative maker-taker fee schedule based not on volume tiers but on the price of the security traded, with per-share fee caps. This approach could greatly reduce execution costs for lower-priced stocks, and, for brokers that don't meet volume-based requirements elsewhere, for higher-priced stocks as well.

"We're talking to those who don't necessarily reap the benefits of the volume tiers on other execution venues," Procopion said.

LavaFlow calculates its fees in basis points, as is common in Europe. The ECN pays customers 0.8 basis points per share for liquidity added to its book (a basis point is one-hundredth of 1 percent of the stock price), with a cap of $0.0022 per share.

LavaFlow charges liquidity takers 1 basis point per share, capped at $0.0028 per share.

LavaFlow's fee schedule gives the ECN a razor-thin spread for stocks under $28, and $0.0006 per share for stocks priced at $28 or higher. For the latter group of stocks, LavaFlow's spread will be bigger than many market centers with volume-based tiers. Nasdaq, for example, earns $0.0001 per share from customers on its steepest volume tiers.