Trading technologist Rob Hegarty spent eight years with buy-side trading giant Fidelity Management & Research handling, among other things, the firm's outbound routing. One destination was Nasdaq market maker Troster Singer.
"They just never choked," said Hegarty, now an analyst with the TowerGroup in Needham, Mass. "No matter how high the volume was, those guys could handle it."
Volume is the name of the game for Troster Singer, now called SLK Capital Markets, as it is for the entire Spear, Leeds & Kellogg family of companies. And technology is the grease that keeps the wheels turning.
Technology means EagleTrader, the new trading system for the Nasdaq operation. It means REDIPlus, the electronic brokerage system used by the firm's clearing customers. And now, technology also means TradeFactory, an electronic brokerage system for program traders.
Spearheading the firm's technology mission are three veterans of the Wall Street technology game: Larry Cohen, SLK's chief technology officer; Mike Appleby, head of SLK's Eagle Software Products group; and Tom Williams, CEO of SLK's electronic program trading firm, TLW Securities.
In a candid interview with Traders Magazine, the three were joined by Randy Frankel, an SLK partner, and Neil DeSena, a managing director, at SLK's Jersey City, N.J. site. It was a rare occasion, as one of the last remaining Wall Street partnerships is usually tight-lipped with the press. "Once a millennium," quipped one. "Yea, and we wanted to get it out of the way early," another said.
By several accounts, SLK is a leader among broker dealers in the technology area. Because it processes so much volume it almost has to be. A quick look at the numbers makes it clear.
SLK Capital Markets became the fourth largest Nasdaq market maker last year, trading 14 billion shares, according to AutEx/BlockData figures. That's up from 8.6 billion shares and sixth place the year before.
REDIPlus sent more automated stock trades to the New York Stock Exchange in 1999 than any other broker, according to the exchange's equity sales department. Nearly 27 billion shares were routed to SuperDot last year, or 13 percent of the total shares traded on the Big Board. That makes REDIPlus arguably the largest least-known stockbroker on the Street. REDIPlus customers are SLK's clearing accounts: day traders, hedge funds and other institutions.
TLW is one of the top program traders on the NYSE. For the week ended February 4, TLW placed sixth, trading 59 million shares for programs on the Big Board. Program trading accounts for about 19 percent of the NYSE's volume.
Work Flow
What does it take to process all SLK's stock transactions?
EagleTrader does the work on the Nasdaq side. The order routing and management system was forged from two proprietary and complementary systems by trading systems wunderkind Mike Appleby. Appleby, who built one of the most popular trading applications on the market – the TCAM System – joined SLK in 1998. His mandate was to develop a state-of-the-art trading system for SLK Capital Markets' traders and to then market it to other Nasdaq broker dealers on a standalone or service bureau basis.
Until recently, SLK used a proprietary system called TAXI, or the Troster Automated Execution Interface, to manage positions, orders and compliance. A separate system called Eagle, a replacement for the Nasdaq Workstation II, was the order routing interface to SelectNet and SOES.
The TAXI backend would accept orders from firms like Fidelity with direct connections to SLK and route them to the TAXI frontend, or terminal. The Eagle backend took quotes from Nasdaq and then pushed them onto the Eagle frontend.
"Spear, Leeds has never used the NW II [Nasdaq workstation] as a display device," Appleby explained. "We've always used a proprietary product because Nasdaq does not provide any offensive or defensive algorithms." Those algorithms permit traders to work faster, whether it's to update markets, send out SelectNet orders, or answer incoming orders.
Eagle Has Landed
To create EagleTrader, Appleby's team of 20 programmers redirected all data from the two backends onto a piece of middleware called TIB/Rendezvous from Reuters' TIBCO division. From there, the data flows to a unified frontend.
Now all data-orders from customers and quotes from Nasdaq-is standardized and flows over the TIB bus.' The software bus, or data distribution mechanism, is a very popular component of Wall Street trading room architectures because of its publish-and-subscribe' method of moving data. Traders subscribe' to a particular stock symbol and receive all information related to it as it becomes available, or is published.' That includes quotes, news, charts and orders.
Cohen says the advantages of deploying the TIBCO middleware are twofold. First, it makes Appleby's programming for the frontend easier and more flexible. "Everything he needs for his frontend he just subscribes to," Cohen said.
Secondly, prospective EagleTrader customers, who also utilize TIBCO technology in their trading room infrastructures, will be able to write applications that combine data from their own systems with that from EagleTrader.
"They get the benefit of full information from diverse sources," Cohen said. "A programmer can write a very simple application that just pulls up positions. He can combine that with data from his bond desk or some other backend system. By putting it all on a bus, it's a standard interface. It's a bell and whistle you get by developing on TIBCO."
Outsiders familiar with EagleTrader are generally complementary. An IT professional at a competitor firm finds it more efficient than his own system. As an example, he said, if SLK gets a 1,000 share not-held order its system might automatically execute 200 shares and then send the balance to SelectNet or execute it against its own book. Or it might display it on an ECN.
"If automation is taking care of orders less than 2,000 shares then their market makers can concentrate on the larger orders that have a greater market impact," he said.
The IT pro added: "My system does not handle that business well at all. Our traders must manually handle an order like that: by double clicking the order; typing in 200 shares; hitting enter; then the balance goes in the book. The trader must now decide whether to put it on an ECN or display it himself. A lot of manual orders slow them down. They're managing an order not a market."
Although it all sounds good, EagleTrader has been slow to roll out to traders' desktops. The system was launched last June at the Securities Industry Association's Technology Show, but is only now making its way onto a handful of SLK trading desks.
SLK executives say more work was needed to enable the system to handle increasing volume, regulatory changes and decimalization. SLK plans to test EagleTrader on its own desk before rolling it out to the general market.
Managing director Neil DeSena explains: "Keep in mind, Eagle is an existing system that we have to maintain and change based on what Nasdaq tells us. At the same time, we are also building EagleTrader, so [the delay is] really the combination of both. Rules changes have definitely affected the delivery date. SuperSoes is a huge one."
A competitor at a large broker dealer sympathizes: "Because things keep changing, they keep changing. But I have the same problem. And it would take me longer to make a change to my system than Spear, Leeds. Much longer."
When it is operational, EagleTrader will facilitate SLK Capital Markets' push to capture more institutional' order flow. Frankel says the division has made an effort in the past few years to move away from retail order flow and go after larger sized trades. "There are 7,000 institutions out there who want to trade tens and hundreds of thousands of shares of stock," Frankel said. "That's the arena we want to be in." SLK's average order size is 1,000 shares while the average Nasdaq trade is 600 shares.
Program Trading
In courting the order flow elite, however, SLK found it was coming up short in one area: program trading. To that end, it bought TLW Securities last December. "Rather than try to recreate the wheel we knew that Tom's system was out there," Frankel said. "We knew it was the best on the Street. We are now a supermarket for any potential institution. Tell us the business line and we have a solution."
TLW Securities is a broker dealer that offers both a discount electronic brokerage service and its primary trading system, TradeFactory, on a service bureau basis. Customers are primarily broker dealers, either trading proprietarily or offering agency execution services to the buyside.
Program trades tend to be large, share-wise, averaging between 200,000 and 250,000 shares at a shot. TLW executes hundreds of trades, totaling between 75 million and 100 million shares per day, Williams noted.
"We don't accept any orders verbally," Williams said. "Everything is straight-through processing. The technology at the client site generates the orders that flow into our infrastructure and out to the exchanges for execution."
Exchanges aren't the only destinations, however. Nasdaq has become a larger part of TLW's business. "Up until the last year or 18 months the majority of what we've done was NYSE business," Williams said. "But Nasdaq has become a very large execution point for program trades. The introduction of the NDX, the Nasdaq 100 index, and its corresponding options and futures has been a big part of the change."
Williams said TLW will typically establish a local-area network (LAN) at the client's site that includes a lot of hardware and software infrastructure and user workstations. That is then connected over a wide-area network (WAN) into the TLW facility where the majority of the hardware and software is located.
Besides its core routing capabilities, TradeFactory includes proprietary data modeling technology that incorporates real-time binary data such as market data or execution data. Users can design their own real-time data model-the microstructure of the market, for example-to facilitate their trading strategies.
The TradeFactory architecture was designed for extremely high throughput, or lots of orders moving through very rapidly. Everything operates out of virtual memory as a disk-based database server was deemed too slow.
Hiring Rocket Scientist
Going forward, TLW has plans to inject more intelligence into its product. It recently hired a stochastic mathematician who has been consulting major securities houses on derivatives pricing and portfolio theory. It also hired a number of programmers who have worked on the development of risk management systems that incorporate portfolio theory.
The added service is intended to help basket traders with their portfolio analysis and optimization. Now, they will either write the programs themselves or contract with a third party such as Barra for such services, according to Williams.
"We want to offer a broader workbench of tools for people implementing these kinds of stategies," Williams added. "We want to get to the point where someone who wants to implement a quantitative trading strategy would need no technology except that available from us. They will be able to incorporate portfolio theoretics and derivatives pricing technology."
Not nearly as high-tech, but a workhorse just the same, is REDIPlus. The system executes 250,000 trades a day for over 5,000 users, according to Frankel.
It is essentially a brokerage-in-a-box for SLK's clearing customers. It routes orders to listed and over-the-counter markets. It supplies market data such as news, quotes and charts. And, it interfaces with SLK's clearing operation.
REDI, or the Routing and Execution Direct Interface, debuted in 1992 as a DOT box. In late 1996, Nasdaq trading was added. Currently, it is being beta tested for options trading. Users are brokerage firms and individual traders.
Many are daytraders. "With the rise of the hyperactive trader we started adding functionality like sweeps and chunks," Cohen noted. "These allow traders to send multiple orders out to different Nasdaq market makers with one single drag of the mouse." The feature is similar to the WAVE function market makers get with Tools of the Trade.
Competition for REDI
REDI does have competition. So-called smart routing technology from such upstarts as CyBerCorp, TradeScape and TradeCast has grabbed the imagination (and dollars) of many daytraders. The software performs a quick scan of the Nasdaq market before sending an order to where it will receive the best fill. Often termed ECN portals' the software is praised for aggregating what is considered a fragmented Nasdaq market. Charles Schwab & Co. was so enamored of the technology (and the frequency with which its users trade) that it shelled out $500 million recently for the Austin, Tex.-based CyBerCorp.
Most observers don't place REDIPlus on the same cutting edge. TowerGroup analyst Hegarty recently covered the ECN portals in a research note that excluded REDIPlus. "[SLK executives] downplay smart routing, but I think it's because it doesn't have that capability," he said.
Robert Kanter, chief executive of proprietary trading firm ETG, has been with REDI since the beginning. "REDIPlus has a [routing] algorithm that works relatively well," he noted. "It doesn't have any particularly high-powered thought process, but the basic algorithm seems to work."
Despite the fact that REDI goes down occasionally, Kanter said his traders are happy with the system. "They're extremely sensitive to having the fastest car on the track," he said.
Kanter adds that a large benefit of the system is the way it helps him to manage his business. "REDIPlus has a lot of supervisory functions, so we can follow what our traders do," he explained. "We can call up any trader's real-time P&L and examine it in detail; we can check it on an individual stock basis. It's a very sophisticated risk control system."
SLK's overall technology strategy is no less sophisticated in its simplicity. All three product lines are based on a single theme: one connection, one firm. "We manage everything for our clients," Cohen said. "They need no inbound lines for market data nor outbound lines to market centers. All they need is a PC and a connection to Spear, Leeds."
That's good for the client, but what about SLK? "Understand that interacting with order flow is the way these businesses make money," Frankel said. "Our goal is to place our box and/or our pipe on every trader workstation in the country, so we have an opportunity to interface with every order. Whether it's to clear it or to broker it or to finance it. To do something with it. That's the big picture."
