Older and Smarter

It wasn’t that long ago that the concept of smart order routing was a foreign one to traders. Only some eight years ago most traders were just getting used to trading on multiple ECNs, doing their best to execute in a fragmented market. Enter the ECN aggregator. Life suddenly became much easier. Traders no longer needed to access each ECN directly because technology, using smart order routing, could do it for them. Systems like Lava and RealTick ended the era of the ECN jockey-may he rest in peace.

Well, markets are still fragmented today. And the equity marketplace is once again calling on its old friend, the smart order router. Driven by Reg NMS’s trade-through rule, and the new liquidity centers that have popped up because of it, routers now must be smarter to access that liquidity. This month’s cover story discusses how brokers are upgrading their routing mechanism for both algorithms and DMA products. As Nina Mehta explains, how orders are placed into the marketplace will be very important under Reg NMS, scheduled to start for brokers on July 9. Full implementation is now slated for October.

The equities marketplace has been somewhat of a testing ground for the options industry. This month’s issue also features a story on NYSE Arca’s success in the options penny pilot. You can read how the maker-taker model, borrowed from the equities market, has been a successful business strategy for the upstart options player. Will other marts adopt this model, so foreign to options?

The penny pilot also reveals some troubling news. Quoted size dropped by 80 percent for the options in the penny pilot. Peter Chapman writes about why some fear this lack of quoted size could impact options trading volume.

Penny trading and quoted size disappearing are things the equities business has already seen. They seriously hurt block trading, practically putting it on the endangered species list. But block trading made a comeback. And it’s not just the crossing networks that are reviving the block. The block space is alive and kicking.

Traders Magazine on September 20th will host its second annual one-day event on block trading. The recipe for a great conference starts with a good topic. Drill down into it, get good speakers, and, above all, make the conference interactive. We did that last year, and it was a rousing success. There’s nothing more exciting than to get a group of equity pros in a room and hear them discuss their industry and how it is changing. I hope to see you there.

Michael Scotti

Editorial Director