Institutional traders who buy and sell securities in foreign markets may want to keep an eye on E*Trade.
The Menlo Park, Cal.-based online brokerage giant is quietly building a globe-straddling electronic cross-border trading network.
The ambitious, multi-year project is designed to allow traders in all of the world's biggest financial centers to trade in markets in these centers. For the most part, the traders are individuals, but the highly successful discount broker is bringing about 650 buyside shops along for the ride.
E*Trade acquired those institutional customers when it bought the international agency broker TIR Holdings in 1999. TIR has since been renamed E*Trade Institutional. The unit's chief technical executive, Steve Ferrando, managing director for institutional and international deployment, puts together all the pieces of the network, dubbed E*Trade Global.
"It will take us several years before we can honor our stated goal of offering 20 different markets," he said. "But we will aggressively roll out bits and pieces this year, next year and the following year. Sometime in the next twelve months we expect to offer U.S. institutions access to all markets where E*Trade Institutional (EI) is a member."
EI belongs to stock exchanges in England, Ireland, Sweden, Germany, Hong Kong, the Philippines, Australia and the U.S. It has been approved by the Paris Bourse and is waiting for a green light from exchanges in Switzerland and Italy.
Before it bought TIR, E*Trade was a relative neophyte when it came to foreign markets. E*Trade licensees dotted the globe, but the firm focused most of its energy on giving cost-conscious domestic investors cheap and fast executions. Now flush with cash, it is buying up those foreign Web sites. It has also assigned four top managers responsibility for each of four global sectors.
The TIR purchase gave it membership in most of the major foreign bourses in one swoop; international trading and clearing expertise; and a large institutional clientele as well.
EI grossed $131 million in fiscal 2000, mostly from commissions, while E*Trade's domestic operation reaped $739 million from commissions and payments for order flow. Nearly three-quarters of EI's transactions originated outside the U.S. A similar amount came from cross-border trades.
Ferrando's bits and pieces are rolling out. Last May, E*Trade Sweden was linked to E*Trade Global, enabling Swedish customers to trade U.S. stocks in their own currency. E*Trade Sweden went first for three reasons. First, the country has more Internet users per capita than any other in Europe. Second, E*Trade Sweden is a wholly-owned subsidiary and not simply a licensee. Lastly, E*Trade Sweden's back office could process foreign trades. Many sites can't.
Norway went live in August and Israel is next on the list, but the U.S. Web site won't plug in anytime soon, said Ferrando. Demand is mostly coming from foreign investors for U.S. stocks. In a similar vein, the U.S. stock markets are the only markets accessible over the network right now. Again, that's because the greatest demand is for U.S. securities.
Adapting E*Trade Global for retail flow is conceptually simple: It means plugging E*Trade Web sites into the network and plugging the network into the world's stock markets. A customer sends his order to an E*Trade Web server over the Internet. The server sends the order to the market center over E*Trade Global.
For institutional order flow the model is still simple too: It means plugging a trader's order management system into the network and plugging the network into the world's stock markets. The trader routes the order directly to a market center over E*Trade Global.
What's apparently not so simple is making the model work. At the retail end, many back office processing systems were designed for domestic, not cross-border processing.
At the institutional end, interfacing electronically with clients is new for EI. Interfacing electronically with exchanges is not new, but, in the past, has occurred haphazardly. EI needed another piece of technology to make it all work.
It acquired that technology when E*Trade bought Canada's Versus Technologies last summer. Versus offers Canadian institutional traders an electronic routing service to the Toronto Stock Exchange called RouteX.
"Before the acquisition of Versus, TIR did not have a consistent platform for connecting to exchanges," Ferrando explained. "We used different platforms in every market. That did not lend itself to being connected into a nice seamless whole. There were a bunch of different connections, but not one homogeneous network."
Ferrando adds that RouteX will offer a single FIX connection to an institutional trader's OMS: "He plugs into our FIX gateway and, boom, he's got the world. We're going to hook [E*Trade] Global into the RouteX network."
EI, which maintains six trading rooms around the world, recently deployed RouteX in its London office and its connection to the Deutsche Bourse. It is not yet live, though. RouteX will also be used in the U.S. to connect to ECNs and in Asia.
The first buyside trader will go live with E*Trade Global sometime this quarter, Ferrando said. He hasn't decided whether it will be a U.S. or foreign customer. "I've got European customers who want to trade in the U.S. and domestic customers who want to trade Europe," he said. "We're getting a lot of interest."
So are others. Most of the top brokers are working to make it easier for U.S. customers to trade in European markets and vice versa. Also, companies such as Reuters and Thomson Financial's AutEx offer cross-border routing between institutional traders and their brokers. At the retail level, a French e-broker called E-Cortal began offering cross-border trading in eight European markets and the U.S. in September 1999.
