Foreign stock markets are just a mouse-click away.
With the recent launch of State Street Global Management's Equity Connect, at least half a dozen agency brokers and vendors now offer direct access to electronic exchanges outside the U.S. Traders can use their own keyboards to hit bids, lift offers or set prices instantaneously on over 20 exchanges from Singapore to Switzerland.
No-frills systems emphasizing fast access compete with fatter front-ends offering full depth of book quotations. Obscure outfits such as Electronic Global Securities and big names such as Instinet are plugging their networks into new markets daily. Users are on both the buyside and the sellside.
The push to link traders with multiple markets coincides with the tremendous boom of U.S. investment in foreign equities and the even greater surge of funds flowing into U.S. stocks from overseas. The Securities Industry Association estimates U.S. investors bought $3.6 trillion worth of foreign equities in 2000, double the amount just two years earlier. In the same period, foreigners increased their purchases of U.S. stocks from $3 trillion to $7 trillion.
The following companies are among the most visible players in the U.S. offering direct access to world markets. (Six are agency brokers. One is a software vendor.) All offer at least some connectivity to U.S. markets as well.
Electronic Global Securities
In business just two years, EGS' specialty is Asia. Via its COMET front-end, the Cayman Islands-registered broker gives its hedge fund clients direct access to markets in Japan, Hong Kong, Singapore, Australia, London and the U. S. Taiwan and Korea are in the works.
Most of its 26 clients are based in Asia, but the release of COMET version 3.0 has given EGS the confidence to ramp up a sales effort directed at U.S. traders. Co-founder Shams Karim says version 3.0 is a major improvement over version 2.0 which only offered direct access to a small group of securities.
Karim, who runs EGS' San Francisco office, and co-founder Tom Ashworth, who runs the Hong Kong office, are graduates of Morgan Stanley's derivatives units in Hong Kong and Singapore. With major backing from the large retail brokerage, Kimeng Securities, they started EGS to capitalize on what they saw as a lack of direct access technology for the institutional trader.
COMET's functionality includes basket trading, VWAP, time-slicing, blasting and allocations. The system does not provide a look at all the quotes on the exchanges, the so-called full-depth of book. "Too expensive," said Karim. Apparently EGS customers don't mind. They want speed of execution above all. They can get quotes from their Bloomberg terminals.
The system is browser-based. That means clients send their orders to EGS over the public Internet. Once there, however, they go out over dedicated lines to EGS' executing brokers. Clients, according to Karim, accept the risks inherent with the Internet in return for a light and fast trading system.
EGS is not a member of any exchange but works through introducing brokers. Karim says there is no loss of speed or efficiency in going through a third party system. Clearing in the U.S. is handled by Investec Ernst.
Interactive Brokers
Chicago's IB is a nine-year-old electronic agency brokerage that grew out of the options market making activities of sister company Timber Hill. It provides inexpensive direct access to U.S. and foreign derivatives and equities markets. Its traditional customer base of active traders generated most of last year's estimated $50 million in revenues.
In the last few years, IB has begun to offer institutional traders a similar service. Clients are on both sides of the Street as well as both sides of the Atlantic. Quants, mostly hedge funds, are a "sweet spot with us," according to executive vice president Tom Ascher.
Proprietary trading desks both within and without large broker dealers are also customers. "It's not unusual to see a specialist firm from one of the U.S. floors that wants to stick their toes in international waters," Ascher said.
Quants can use their Excel software in conjunction with IB's front-end, Trader Workstation. Running their applications in real-time, they can pull data in and out of Trader Workstation; generate orders; and send them directly out, according to Ascher. Connections to IB's system are direct through a CTCI (computer-to-computer interface).
Trader Workstation features include basket trading and an options analytics package. Traders get full depth of book quotes, "to the extent that it is offered," Ascher said.
IB, or an affiliated company, is a member of nine European equity exchanges – Deutsche Borse, Valori de Milano, Stockholm Fondbors, Swiss Exchange, Virt-x, London Stock Exchange, and the three Euronext platforms – Amsterdam, Brussels and Paris. It has, "large order desk capability" in Zug, Switzerland, and is building it in Greenwich, Conn., as well, according to Ascher. Greenwich is the home of sister company, Timber Hill.
IB's progress has not come without setbacks. An agreement announced a year ago with Trading Technologies, a Chicago-based derivatives front-end software firm, has come to naught. A joint venture was to have given TT clients access to more markets and IB clients an alternative front-end. TT, however, ultimately decided not to venture into the equity markets.
TT's front-end had features IB's did not. Ascher won't say whether TT's front-end was better-just "an alternative"-but does say IB's interface has "evolved many generations since those discussions."
Neonet
The Swedish agency broker got its start in 1996 patching European investors into the Stockholm Exchange. By mid-1999, it had four Northern European exchanges under its belt – Stockholm, Helsinki, Oslo and Copenhagen. It has since wired itself into the German Borse, the London Stock Exchange, Euronext, Milan, Virt-X and Nasdaq.
In search of more customers, it crossed the Atlantic in 1999 and set up shop in New York. Peter Gaffney, president of the U.S. unit, says his group has signed one sellside and seven buyside firms. Jefferies in New York is a user. CAPIS in Dallas has also agreed to route its customers' European equity trades through Neonet. Customers are split 60-40, buyside-sellside. In Europe, customers total 72 buyside and 39 sellside.
Growth has been strongest in the U.S., albeit from a small base. Neonet's European operation failed to meet its self-imposed target of 50 percent growth last year, but the U.S. did. The U.S. unit accounted for 21 percent of Neonet's $19 million (Krona equivalent) in gross revenues, up from nine percent in 2000.
A deal with BRUT, one of the top six ECNs, makes it possible for Neonet's European clients to trade Nasdaq stocks. BRUT connects to the ECNs Instinet, Island, REDIBook, and Archipelago. It does not connect to Tradebook. Neonet plans to establish a link with the New York Stock Exchange as well.
Some customers eschew the NeoTrade front end with its market data and other features in favor of a raw connection. Jefferies is one. It pushes the technology out to its customers, giving them direct access to European exchanges, eliminating calls to the trading desk, Gaffney says.
Neonet is a member of all the exchanges to which it connects. Gaffney says that matters. "Owning the membership confers certain clout," he said. "You're not just piggybacking on someone else."
Gaffney has been with Neonet for two years. Before that he oversaw trading technology at PaineWebber. He worked to tie its various trading desks – program, block, OTC – together under one infrastructure. He also worked on such issues as exchange connectivity and FIX. From 1983 to 1989, he headed the international desk at the Jersey City wholesaler, Mayer & Schweitzer, now Charles Schwab Capital Markets.
Neonet's target market is the top 250 buyside firms in Europe and the top 100 in the U.S. The firm only approaches the most financially sound institutions because it must purchase insurance to cover itself against possible financial mishaps. It looks carefully at the level of a prospect's capital before pitching its services.
Gaffney acknowledges there is a ceiling on how much business an electronic agency broker can expect to receive from a buyside firm. In Europe, he figures Neonet gets about a quarter of the typical institution's business. He doesn't expect that fraction to rise above three-eighths.
GL Trade
With 500 to 600 clients throughout the world, this French firm is the most established provider of international direct access. Most of its customers are European broker dealers. GL Trade is not a broker itself, but rather a software firm.
It has been in the U.S. since 1998 and counts about 60 sellside firms as customers, according to Jeff Patrick, head of marketing. "U.S. brokers want access to many markets," said Patrick, "but they also want to tap into the large number of European customers on our network." U.S.-based customers include Bear Stearns, Spear, Leeds & Kellogg, SG Cowen and BNY ESI.
The 13-year-old GL Trade still makes most of its money in Europe. In 2000, its trading business took in FF 125 million in France; FF 140 million in the rest of Europe; FF 32 million in the U.S.; and FF 5 million in Asia.
Patrick notes the firm's GLNet network is actually more popular than its front-end GLWin. That's because most brokers prefer to write their own front-ends. They use APIs to connect to GL Trade's network. "Large firms like to use their own IT staffs," Patrick said. GLNet allows users in one market center to route orders to an executing broker in another. There are over 100 users on the network.
Broker dealers that use GL Trade must make their own arrangements for legal access to the exchanges. Some are members. Some are not. Those that aren't must connect through another broker. "Some U.S. customers are actually accessing the markets indirectly because they are not members of the exchanges," Patrick said. "But they get the same viewpoint."
They also get connectivity to the most markets – 22. That includes such destinations as Brazil and Ireland.
The executive says GL Trade had a good 2001 partly because of the downturn in U.S. markets. Investors apparently decided to increase their diversification outside the U.S. Patrick is worried about 2002, though, because IT spending is expected to be flat.
Bloomberg Tradebook
Bloomberg became a global agency brokerage in May 1999 when it contracted for the services of CLSA Emerging Markets, a securities unit of French banking giant Credit Lyonnais. The Hong Kong-based CLSA formed G-Trade Services to provide Bloomberg with execution, clearing and settlement of non-U.S. trades on an exclusive basis.
Since completing its links to the major European and Asian exchanges last year, Bloomberg now offers direct electronic access to 15 non-U.S. exchanges. It also offers full-service human' trading services to many more. It is a member of some exchanges and piggybacks' member firms at others.
Recently, G-Trade Services was sold to Bank of New York which has long handled clearing and settlement for Bloomberg's U.S. business. Sanjiv Gupta, Bloomberg's director of research, views the move as positive for Tradebook clients. "It means one counterparty for all worldwide transactions," he said.
That the G-Trade layer comes between a trader's Bloomberg terminal and an exchange is not significant, says Gupta. "It's almost instantaneous," he said. "There is one stop at our Bermuda hub to check to see if the order is within the correct parameters."
Now that Bloomberg has completed its network of exchanges it is busy enhancing its functionality. A few improvements are scheduled to roll out in the next few months, according to Gupta.
For its traditional single-stock customers, it will add electronic upstairs' trading. Similar to the reserve or hidden' features now found on many ECNs, the new feature will allow traders to keep a part of their order off the exchange. "Your whole order can fit on the exchange, but only a certain portion of it can be seen," explained Gupta. "We are creating an upstairs electronic book."
The brokerage is also inaugurating a link between E-Crossnet, an electronic crossing system based in London, and the London Stock Exchange. At the moment of a cross, for example, the reserve portion of a trader's order would move to E-Crossnet and seek a match. If a match doesn't occur, the order returns to the continuous market.
Bloomberg is also trying to win more list trading business. It currently offers basket traders electronic do-it-yourself functionality as well as a manned trading desk. To appeal to traders with lists covering more than one market it is creating trading strategies specific to individual countries and ways to store those strategies. "So, when you upload a basket, you grab one of those pre-saved strategies and send it out with the basket," Gupta said.
Bloomberg intends its international business to account for one-third of its revenues within the next two years. (The balance is to come evenly between Nasdaq and the listed markets.) Last year, international had the highest rate of growth, Gupta said.
Instinet
Although Instinet offers electronic direct access to 18 foreign markets it considers the service just one part of its total global agency brokerage package. It has trading desks in London, Paris, Frankfurt, Zurich, Tokyo and Toronto. It views the large investment banks as its competitors as well as the smaller electronic types.
Instinet belongs to the London Stock Exchange, Euronext Amsterdam, the Borsa Italiana, the Deutsche Borse, the Paris Borse, Virt-x and the Stockholm and Swiss exchanges. Access to Europe's smaller exchanges is through intermediaries.
The broker is well entrenched in Europe and has even invested in one of the continent's stock exchanges-Switzerland's Virt-x. In Japan, it has partnered with a unit of Citigroup to form a crossing system. All totaled, a whopping one-third, or $1 billion, of Instinet's assets are located outside the U.S., according to a filing with the Securities and Exchange Commission.
Business boomed overseas for Instinet last year, but that did not translate into revenue growth. The broker executed 7.7 million non-U.S. trades-up from 5.2 million in 2000-but the associated revenues declined from $207 million to $199 million. In reaction, Instinet closed its office in Sydney, Australia, and downsized its Zurich office.
Nevertheless, it is plowing ahead. Like Bloomberg, it is chasing the basket traders with new list-trading technology developed with U.S. and European money managers.
State Street Global Management
Equity Connect is the latest step in State Street's ambitious plan to give fund managers direct access to markets for the three dominant asset classes-equities, fixed income and money. State Street has already launched FX Connect and Money Market Connect. All three systems sit aboard a platform known as Global Link which extends to market centers as well as clearing and settlement systems. Overseas, Equity Connect only reaches the London Stock Exchange, but connections to other markets are planned.