Bad trades are good for business if you're Richard Spires and Jim Hayden. The two men are president and product management leader, respectively, of Mantas, a start-up that sells technology to monitor trade execution quality.
The Fairfax, Va.-based vendor was recently spun off from SRA International, a developer of data mining and pattern recognition software. SRA counts both the NASD Regulation and Merrill Lynch as customers.
For the regulatory arm of the NASD, it built the Advanced Detection System that monitors the executions of all NASD members. For Merrill, it built BEAMS, its Best Execution Analysis and Monitoring System, which analyses all of Merrill's 150,000 daily trades. Both systems compare orders with their executions, taking into account market prices at the time. Best execution' is one of four software modules Mantas is offering to brokerages. They answered questions from Traders Magazine's Peter Chapman about their services.
Traders: What does the best execution' module do?
Spires: It monitors internal and external executions to ensure the customer is getting the best execution possible. It is for the trader's benefit to ensure he is not disadvantaging a customer. Traders at Merrill, for example, get an alert if they have disadvantaged someone.
Traders: How does it work?
Spires: A pre-canned set of patterns, developed with Merrill, uncover "behaviors of interest" occurring in the firm's historical order execution data. Based on that information and prevailing market conditions, it instructs firms where they should route their orders.
Traders: We thought firms had rules-based routing systems to do that.
Spires: Yes, but we can enhance those business rules. We let them really understand how the business operates, not how they think it operates, by analyzing the data. We're providing back-end analytics to make better routing decisions.
Traders: Can you be more specific?
Hayden: We generate rules that say: you've had the best luck in sending your order to this market center in the past when these conditions prevailed, so you might want to update your rules in your real-time order-routing system.'
Traders: What are some of the factors the software considers?
Hayden: Size. Type of product. Current market volatility. Liquidity. Some firms look at over 20 factors when deciding where to route.
Traders: What does Merrill do?
Hayden: For Merrill, we built a scorecard system based on what they thought was important across a number of factors-timeliness, for example. They were able to rate their various market makers for different security types. They can look at their preferencing relationships and ensure they are strategic relationships – to see that their expectations are being met.
Traders: Firms are worried about that?
Spires: Just about every firm that routes orders out wants to analyze the relationship they have with the executing broker. We're simply supplying them with more intelligence than they've had in the past. We give them the ability to look at a variety of factors and decide how heavily to weigh each of these factors.
Traders: So, individual firms may have different requirements?
Hayden: Yes. For example, a retail firm might care more about the timeliness of an execution whereas a wholesale firm might care more about VWAP. They can actually tune these for their volume; for their definition of best execution.'
Traders: How about internally-executed orders?
Hayden: Among other things, the software can determine if there is a system's error. For example, if a certain order type is always late, it might be because it is on a LAN node that has a 10-second delay. They often find it is not the trader's performance, but a system's problem.
Traders: How has decimalization affected your approach?
Hayden: Firms are telling us that it's a lot more difficult to get an order executed at any one point in time when the quotes are changing every second. Quote activity has increased fourfold. So, we've added some windowing technology to our rules. We look at a window of time rather than that one point in time when the order was received.
Traders: The NBBO is not as relevant anymore?
Hayden: Before decimalization, quotes didn't change for five seconds or so. When you placed the order you'd expect to get what the quote was. We have not done away with the NBBO. But we've added the ability to look at these different factors.
Traders: What does that say about best execution?
Hayden: The issues around best execution change everyday. People no longer look at the aggregate on the inside. They are looking at time and sales data instead. They are looking at what price the last trade was executed.
Traders: Merrill paid about $5 million for BEAMS, leading many smaller firms to complain your technology is too costly. Do you have anything for them?
Hayden: We heard that message loud and clear. We are not only looking to provide large-scale enterprise solutions, but also to offer an online service module. Hopefully, that will appeal to mid- and small-tier brokerages.
Traders: You're talking about a service bureau?
Spires: Yes. The Merrill solution was a client-server application. We re-architected the platform. We are now Web-based. We can run over an Intranet or the Internet.
Traders: When will that be available?
Spires: Right now we are looking at how we want to go to market for the online service. Technically, we can do it. The question is: Do we want to partner with others? We're looking at the business options now.
Traders: Thank you, both.
