Direct Edge ECN outlined its plan for its new stock exchange.
At yesterday’s pre-conference session, Direct Edge told attendees at the Security Traders Association’s 76th Annual Conference & Business Meeting, in Scottsdale, Ariz., it believes it will win Securities and Exchange Commission approval for its new stock exchange by the end of the year.
With that in hand, the organization intends to "power down" its two ECN platforms and convert to a new trading platform that it says is at least 10 times as fast as its current system. Today, Direct Edge operates on the old Attain ECN platform that co-owner Knight Capital Group purchased four years ago.
To achieve improvements in speed and capacity, Direct Edge plans to utilize technology it acquired when it bought the stock exchange business of the International Securities Exchange last year, according to Direct Edge executive Bryan Harkins.
"Our plan is to retire our legacy EDGA and EDGX ECNs and replace them with new dual exchange platforms," Harkins said. "This is a big transition. We are launching a completely new system in a new data center."
Direct Edge’s new exchanges will be supported by a new matching engine that will be capable of processing 400,000 messages per second. It will be able to reduce its response times to below one millisecond," Harkins said.
The ECN operator has seen strong growth this year at a time when most of its competitors are losing market share. Direct Edge has increased its share of cash equities trading from 4.9 percent in October 2008 to 11.9 percent in September 2009. It is now the third largest cash equities market center.
Harkins attributed the growth partly to improved technology, which brought in high-frequency trading firms. "The high-frequency traders have been voting with their order flow because of the enhancements we made," Harkins told the STA crowd.
Competitive pricing also played a role, Harkins said. The use of the ISE’s exchange license enabled Direct Edge to collect market data revenues which enabled it to offer pricing better than it could as just an ECN.
Once it becomes an exchange, Direct Edge plans to keep the ISE’s Midpoint Match, embedding it into its EDGX Exchange. The dark pool offers price improvement as well as reduces access fees for those taking liquidity, Harkins explained.
On the competition front, the newly minted exchange would have a slew of initiatives, Harkins said. Despite the hurdle of challenging the established brands, it intends to offer some sort of listings service, Harkins said. It will also move into the market data space.
In contrast to many of its peers, Direct Edge has no immediate plans to enter the options business, nor European cash equities.
It does intend to work with the ISE on a way to make it easier to trade options (ISE) and stock (Direct Edge) alongside each other. Harkins noted that the Chicago Board Options Exchange is doing something along those lines with its CBSX stock exchange.
Lastly, Harkins said, Direct Edge will work with stock loan innovator Quadriserve to try to bring transparency to the stock loan business.
