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November 1, 2010

Sellside Bares All

Brokers Open Up Order Routing Practices to Buyside

By Peter Chapman

A fragmented stock market and an aggressive new breed of trader have long-only buyside traders wringing their hands over the handling of their orders. The institutions are worried their brokers are routing haphazardly, exposing too much information and running up their trading costs.

Greg Tusar, Goldman Sachs

To get some piece of mind, they are demanding their brokers provide detailed road maps of their order routing. They want to know where their orders are going and how they are being treated once they get there. The pressure is forcing brokers to engage in a level of hand-holding never seen before.


See Sidebar: Morgan Stanley Faces Off Against HFTs


Greg Tusar, head of Goldman Sachs' electronic trading business in the Americas, is in the thick of it. "We have gone from a market structure that was reasonably understandable, where you walked an order from point A to point B, to something that is incredibly complex," Tusar said at a recent industry conference. "Transparency is now key. You have to show people where their orders went."

Goldman is doing just that with its own clients, through reports that show where their orders were executed and where they weren't. The big broker is also pushing to make that practice universal through regulation. In a letter it wrote to the Securities and Exchange Commission this June, it suggested the SEC broaden its Rule 606 to take into account unexecuted as well as executed orders. Right now, the rule requires brokers to report quarterly the venues at which its orders got filled. Goldman believes brokers should also be required to report those venues to which they sent orders that did not get filled.

Goldman also told the SEC it hopes to see exchanges and alternative trading systems make public more information about their rules and functionalities. Tusar is especially focused on dark pools. "It doesn't help for it to be as opaque as it is," Tusar told the crowd at this year's Security Traders Association confab in Washington. "Let's publish exactly how these things work, so people can see exactly what the order types are, who uses them, how you can find tiers and how you can opt in or out."

This urge to shine a light on the inner workings of the order-handling practices of brokers and trading venues stems from buyside angst over market fragmentation and high-frequency traders. Regulation NMS, in effect since 2007, has both splintered the market into about 70 "lit" and dark venues, and spawned an explosion of high-speed black-box trading. The buyside believes there are too many venues in which to search for liquidity and too many venues in which "predatory" HFTs can hide.