When Goldman Sachs pur chased Spear, Leeds & Kellogg last year it acquired more than its trading prowess. It also snagged some popular direct access technology. Spear's REDIPlus is used by the small broker dealer customers of Spear's clearing division to access news and quotes, track positions and route orders to the listed and Nasdaq markets. It is being revamped to appeal to Goldman's institutional clients. Neil DeSena, managing director of Spear, Leeds' REDIProducts division and Duncan Niederauer, a Goldman managing director now working in the SLK division, discussed the initiative with Traders Magazine's Peter Chapman.

Traders: Why is a top block trading house like Goldman helping its customers bypass, in many cases, its own trading desks?

Niederauer: It's unrealistic for firms like Goldman to expect clients to do business with us only in a high-touch, high-cost, high-service fashion. In other words, in an environment where sales traders interact with Nasdaq market makers and block traders, all for five cents to six cents per share.

Traders: The buyside wants more choices?

Niederauer: Over time, clients have directed some of their business through direct access pipes to the NYSE; some goes through ECNs. They've figured out ways to divide up their volume. They will tend to execute it at many different price points in many different ways – from requiring really high-touch services to low touch.

So we thought it a pretty powerful combination to offer our buyside clients a best of breed suite of execution services. We have high-touch complicated products that require capital commitment as well as high-speed, very efficient direct access to the New York Stock Exchange.

Traders: And that's REDIPlus?

DeSena: REDIPlus gives institutions direct electronic access to the New York and the Nasdaq markets. It also lets them route their orders to any upstairs trading department of their choice. That includes the desks of Goldman Sachs and Spear, Leeds as well as of any broker dealer willing to connect to REDINet.

Traders: REDINet?

DeSena: REDINet is the order routing network within REDIPlus. The REDIPlus system has, of course, always incorporated an order routing network. But for this initiative we've broken it out and labeled it REDINet. REDIPlus is the front-end. REDINet is the network. For those who would rather connect to REDINet through their own order management systems, we offer a FIX API and a proprietary FIX engine. We believe some customers will want to connect their OMSs directly into REDINet rather than use REDIPlus.

Traders: Which systems can they access at the New York?

DeSena: Institutional Xpress, Direct+, the BBSS, and SuperDOT. A lot of this will be [matrix] table-driven. For example, an order of 10,000 shares or less might go to SuperDOT while a large order for, say IBM, would go to a particular floor broker. The trader or the manager will pre-program the destination.

Traders: How about NYFIX, the competition to BBSS?

DeSena: We're thinking about it. We actually have a link into NYFIX, but we haven't instituted it. If one of my customers says he wants a link to NYFIX, we'll go live with it.

Traders: Will REDIPlus route to every floor broker on the BBSS?

DeSena: No. We'll either provide brokers or let institutions tell us which brokers they want on the network.

Traders: How much business are you currently doing on Institutional Xpress and Direct+?

DeSena: Well, Institutional Xpress hasn't really caught on yet, but we handle about 24 percent of the share volume done on Direct+. Keep in mind Spear Leeds accounts for 15 percent of the share volume of DOT. We've been No. 1 for the last five or six years. But we think we can grow Direct+ higher and see no reason why we shouldn't be 24 percent of Xpress either.

Traders: How about Nasdaq? Does REDIPlus offer an institution smart' routing within Nasdaq?

DeSena: It sends the order to our ECN, REDIBook, which scans the market for the best execution.

Traders: Any unfilled portion resides on REDIBook?

DeSena: That's correct.

Traders: Your multi-broker strategy means you will route your customers' orders to your competitors?

Niederauer: That's right.

Traders: Why in the world would you help your competitors take in order flow?

Niederauer: A large institution is unlikely to do 100 percent of its business with Goldman or Spear Leeds. We will get a share, but if we want to be important to that customer, we need to be the enabler that lets them get to their counterparties. They're going there anyway.

Traders: You said that you see your multi-broker initiative as beneficial to the sellside as it is to the buyside. Why?

Niederauer: It's a convenient way for them to get business from their clients.

Traders: I understand there is some frustration on the part of the sellside in dealing with the OMS vendors too.

Niederauer: Yes. The majority of OMS vendors are small firms with limited experience in this area. They end up outsourcing the network anyway. That is not the case here. This is a huge network. There is a lot of expertise in this space. So, if you are a sellside firm frustrated by how hard it is to get orders from your client because so many of the OMS vendors aren't terribly good at it, well here is somebody who will enable that connectivity that is pretty darn good at it.

Traders: Any conflict of interest here? They are your competitors.

Niederauer: No. We are strictly the network provider. We are not acting as broker. We are an enabler, not a competitor, in this scenario.

Traders: The sellside would connect directly to REDINet?

DeSena: That's right. And the buyside would use REDIPlus or their order management system.

Traders: Goldman owns 20 percent of OMS vendor Eze Castle.

DeSena: They can use any OMS. We connect to all of them.

Traders: Which side will you charge?

DeSena: I'm not sure. We might charge both sides. We might charge only one side.

Traders: How far along are you with the multi-broker initiative?

DeSena: We've just begun. The two destinations are Goldman and Spear, Leeds. But because we don't have this in yet we are allowing our customers to do step-outs. The customer can give the trade up to somebody else. They route the order to us, but ask us to pay someone else. It doesn't accomplish the same thing as sending the order to a sales trader, but it shows our good faith. We are saying, You don't have to do all of your business with us. We are going to give you some options.'

Traders: Thank you.

There are signs the flow of cash into equity mutual funds that drove stock trading volume through most of the 1990s is slowing down. Money-market funds added a net $28.75 billion, during a one-week period in August, pushing total assets to $2.081 trillion. That's small in comparison to total stock mutual fund assets but it may be an ominous sign. At the same time, the latest round of SEC re-engineering is driving dealers inexorably towards a more full-blown agency market.

Still, the confluence of these events may propel STA members to become more active in the SEC rule-making process. For if members do not become more active, the end may be in sight for some traders. This is not an irrational fear. It is both the tinker's curse and the blessing contained in Section 11A in the amended Securities Exchange Act of 1934, and it is an objective of modern securities regulation: The opportunity for investors, consistent with other market goals, to execute orders without dealer intermediation.

That said, the STA, as a voice of the trading community, must be clear about its own goals. And that's a complicated matter. For starters, the STA must reconcile what appear to be irreconcilable opposites – the wishes of the buyside and of the sellside and the various constituencies within each group. And it must obviously not confine its mandate to a narrow parochial interest. To that end, the STA should become the sponsor of an extraordinary meeting of industry power brokers – from the New York Stock Exchange to the Archipelago ECN, from the thinning ranks of the OTC desks to the executive suites of the major block-trading houses. These leaders would eventually emerge with a sort of Magna Carta of the trading world. That Magna Carta, legally binding on each party, could hold tremendous sway in the chambers of the SEC. It could force a re-examination of the increasingly outdated National Market System enacted by Congress in 1975. Sure, the SEC has had its own share of soul-searching, including its Market 2000 Study. But this convocation would be different – an industry-inspired, free-market endeavor of the future.

The next step: The STA needs millions of dollars (this is not a typo) in annual contributions to represent the trading community in more than a superficial way. At its current level, it is impossible to effectively lobby the lawmakers. With more money, the STA could hire hotshot attorneys from the departing ranks of the SEC, ratchet up its efforts in Washington, buy television and radio spots during Congressional elections, and cultivate productive relationships with consumer advocates and the academic elite. The moment is perfect. The broad self-interest of traders, on both sides of the aisles, is under attack. The chairman-elect of the STA, Michael Bird, who recognizes the need for more money in the treasury, says so in this month's Cover Story. The STA, he said, can use the current angst among traders as a source of energy to motivate them. So let the motivating begin.

Market Depth

Market depth has loosened in the SuperSOES era, engendering mixed feelings among market makers. Keith Brickman, head of Nasdaq trading at Morgan Stanley, says attributing changes in depth to SuperSOES is folly as the system is too new and volume is depressed. But, he notes, "depth of market has clearly widened. You're not seeing penny increments all the way up and down."

Market depth refers to the gaps between the bids or between the offers. Under SelectNet, many of those quotes were 100-share throwaways used to sniff out supply and demand. Market makers could hold their quotes for 17 seconds, often tying up others. In the SuperSOES auto-ex world, quotes simply vanish. Consequently, those remaining are more likely to indicate real' trades. "Liquidity is more identifiable," said Len Hefter, head of Nasdaq trading at Jefferies, Dallas who applauds the change. Other traders miss the 17 seconds. "I could sit there and listen to the order flow," said one trader. "I could sit there and not be forced to move."

Bearish Wick

Nasdaq, blindsided by a bearish market, will probably have to live through more pain. Hardwick Simmons, chief executive of Nasdaq, doesn't expect a recovery soon. "We expect the current soft market conditions to continue for at least the balance of the year," according to Simmons, who was commenting on the recent grim numbers for his organization.

Nasdaq, which recently jettisoned 10 percent of its workforce, reported a big drop in earnings for the quarter and the first half of the year compared to the first quarter and first half of last year. What went wrong? "From a financial point-of-view, Nadaq directly felt the financial impact of the softening economy, demonstrated by a weaker IPO market and a recent decline in average daily trading activity," Simmons said. "Anticipating these market conditions, we have moved to aggressively reduce expenses from budgeted levels to position ourselves better for the second half of the year."

The Winner

Third market dealer Bernard L. Madoff Investment Securities swept the first monthly small-order best execution beauty contest for listed securities. The SEC's new Rule 11Ac1-5 requires market centers such as Madoff to make public every month a standard set of statistics that measure the quality of the executions they give brokerage customers.

In two key measures, the effective spread and speed of execution, Madoff bested its six biggest rivals for orders under 5,000 shares in S&P 100 stocks. In the 5,000-share to 9,999-share category, though, Madoff was beaten by Knight Trading Group. Conspicuously placing last in all size groups was the New York Stock Exchange. In its defense, the Big Board's Website notes that the data excludes block trades, or those of 10,000 shares or more, categories in which it is dominant. Analysts expect the numbers to change brokers' order-routing habits. "This is data that compliance officials can't ignore," said Alan Shapiro, president of the Transaction Auditing Group, an independent organization publishing firms' data.

Fleet Trading

Add Fleet Trading, a division of Fleet Securities, to the growing list of firms undergoing shake-ups. Two vets have exited the firm – William Black, previously chief executive, and Neil Feldman, formerly president. A spokesman for Fleet said both Black and Feldman left voluntarily, but added that, "we have had to take a more pro-active approach to our business and to do some re-engineering to ensure that we stay competitive in this kind of market."

A management committee chaired by Leslie Quick III, chief executive of Fleet Securities, will oversee Fleet Trading. The committee also includes Fleet Trading's Kevin Butler, managing director, institutional trading; Patrick Clarke, managing director of trading; Eric Vervoordt, chief operating officer, and Fleet Securities' chief operating officer, John Bahnken.

A proposal to make it easier for self-regu latory organizations to file new rules is "unlikely" to be approved by the Securities and Exchange Commission, according to a senior trading executive in the Nasdaq community who is familiar with the rule.

"I think it has little chance because lots of people in the industry have told the SEC that it isn't going to work," according to the source, who did not want to be quoted by name.

The proposed rule 19b-6 is designed to give stock markets a better chance to compete against electronic communications networks and other electronic trading systems.

Exchange officials have charged that they are subjected to long delays in obtaining rule changes, delays that their electronic trading systems' competitors now do not face. That, exchange officials have said, gives their electronic competitors an unfair advantage.

The rule, as proposed by the SEC, would speed up the regulators consideration of SRO ruling filings.

According to the SEC filing, the rules would "require that the Commission issue a release relating to the proposed rule change within 10 business days of filing with the Commission, or within such longer time period as to which the SRO consents in writing."

Trading Rules

Besides the expedited review period, the proposed rule also expands "the categories of proposed rule changes that qualify for immediate effectiveness to include trading rules" and it would allow SROs to file rules changes electronically.

However, the SEC also noted that, if the SROs are allowed to have changes reviewed quicker, then proposals must be drafted with precision.

"In light of past problems with SROs submitting unclear rule filings," said the SEC, it is proposing to prescribe in Rule 19b-6, "the items that must be included in the rule filing for it to be considered properly filed."

These would include, "a statement of the authority for and the basis of the proposed rule change, including the impact on competition, as well as a summary of any written comments received by the SRO."

Several SRO officials have complained that requiring the SEC to act on a rule filing within a quicker period is illogical because the agency already moves very slowly. They say the SEC usually takes more than a year to act.

Several exchanges have filed negative comments about the changes. However, others have supported the proposed 19b-6 rule, among them the Philadelphia Stock Exchange. The ECN, Bloomberg Tradebook, also supports the rule. The New York Stock Exchange is reportedly a critic of the reform.

A NYSE spokesman didn't return calls seeking comment. The Nasdaq source, who insisted the reform wouldn't be approved, said there is another reason why it is doomed: Harvey Pitt, the new chairman of the Securities and Exchange Commission, is also going to let it die because of the large amount of criticism from ECNs, SROs as well as from buyside and sellside officials.

A Nasdaq spokesman didn't return phone calls. The SEC declined comment.

See you after Labor Day. That's what trading industry Congressional lobbyists are thinking about their biggest legislative priority.

Congress adjourned and went home for the summer without putting the finishing touches on the Section 31(a) reform bill, but securities industry sources are still confident that the tax relief measure, which would reduce a transaction fee, will easily pass when lawmakers return this fall.

"It will be on the top of the agenda when they get back after Labor Day. We have been promised that," according to a spokesman for the Securities Industry Association, one of a group of organizations that is pushing for a cut in what the industry complains is a pesky tax, which is designed to fund the costs of regulating markets. However, in its current form, it raises about five or six times more money than is needed. The overflow goes into the Treasury to be spent on any government program.

SIA officials say their Section 31(a) reform bill will be a Congressional slam-dunk. "There is no active opposition to these bills," the SIA spokesman added.

Well, maybe. But officials of the securities industry, which has been burned several times over the past few years in its unsuccessful attempts to reform Section 31(a), are not assuming that there is no chance that the measure will run into any last minute roadblocks.

A possible roadblock is that the Senate is now controlled by Democrats, the party that was in the minority when the latest Section 31(a) reform legislation was introduced last winter. Could any Democrats be having second thoughts about a bill that some of them might grumble is a boon for the rich? Nasdaq officials were obviously trying to head off any possibility of that when they recently sent a letter to the new leaders of the Senate.

"The chief executive officer of the Nasdaq Stock Market, Hardwick Simmons, today praised Senate Democratic leaders for their commitment to promptly consider the Investor and Capital Markets Fee Relief Act (H.R. 1088) when Congress returns from its August recess," according to the Nasdaq statement.

The Security Traders Association also continues to push the Senate to put the finishing touches on the legislation. The STA said it is still very optimistic, citing a statement about HR 1088 by Senate Majority Leader Tom Daschle: "The legislation is long overdue. Fee reductions can free up new investment capital that can help spur the economy at a time when it needs a boost."

The measure, and a companion bill in the Senate, SB 143, have had overwhelming approval whenever either one has come to a vote. The House bill passed on a 404-22 vote this summer. However, there are slight "technical" differences between the House and Senate versions of the Section 31(a) reform bill that must be adjusted. Nevertheless, lobbyists are predicting that the bill will finally make it into law sometime this fall.

Regulators continue to study program trading as a source of market volatility and as a possible new area for additional regulation.

A new report has cited five firms as the biggest program trading operations on the New York Stock Exchange. They include UBS Warburg, which executed the most program activity as a principal for its own account, according to recent figures from the New York Stock Exchange. Other big programming trading firms included Bear Stearns and Spear Leeds. They executed most of their program trades as an agent for customers.

Goldman Sachs and RBC Dominon, two other big program traders, split their activity between acting as an agent and a principal, according to Big Board officials. Program trading amounted to 27.6 percent of average daily Big Board volume of 1,010 million shares, exchange officials said.

The goal of improving the New York Stock Exchange's XPress system is commendable, but a proposed reform doesn't go far enough. That's according to a recent letter from the Investment Company Institute (ICI) to the Securities and Exchange Commission.

The NYSE reform under consideration would decrease the number of shares required for quotes and orders to become eligible for XPress. It would also reduce the time that a published bid or offer must remain at the same price.

But, Ari Burstein, who is Associate Counsel for the ICI, said that proposal is inadequate.

"In particular while reducing the minimun size of an XPress quote and order from 25,000 shares to 15,000 shares and the time period for designation of an XPress quote from 30 to 15 seconds represents an improvement, albeit a small one, to the XPress system as currently structured," Burstein wrote the SEC, "we do not believe it will effectively address the most pressing concerns that our members have – inadequate protection of limit orders placed on the exchange's limit order book and the inability of investors to effectively interact with those orders."

Big Board Specialists would enjoy an advantage in how a company is listed under a proposed rule filed by the New York Stock Exchange with the Securities and Exchange Commission.

Under the rule, a prospective listing company would be able to recommend a particular specialist when the exchange's allocation committee is deciding on a specialist for the company's stock.

The company, under the proposed rule, would be able to inform the committee which specialist firm helped it decide to list on the NYSE. The issue of which specialist is selected is almost as old as the Big Board. It is also creating controversy. Some specialists have contended that they are shut out from selection by an old boys network.

Currently, a company planning to list on the NYSE has two methods of selecting which specialist can trade a company. It can have the Big Board's allocation committee find a specialist for it. The committee has a handful of specialists it uses. Secondly, the company can describe to the committee the kind of specialist it wants. However, it cannot name a specific firm.

With or without the rule, it could become easier for a specialist firm to make it into the committee pool because the number of specialist firms is declining. A spokesman for the NYSE declined comment.

Several regulators and much of the securities industry aren't doing enough to warn investors about online trading, says one government agency that is studying the issue.

The Securities and Exchange Commission, the National Association of Securities Dealers and, most of all, broker dealers are among those that must do more to prevent investors who trade online from hurting themselves. That's according to a recent report of United States General Accounting Office.

The regulators and the brokerages are failing to provide investors with adequate warnings at Web sites, the GAO said. A big oversight, the GAO said, was the failure to adhere to a NASD rule that requires disclosure of margin regulations to investors who are online traders. The GAO report found about one third of brokerages were not meeting this standard. The report calls for the SEC to "ensure conspicuous plain English disclosure of margin risk."

More laws and regulations are not needed to protect the integrity of market data information, according to Securities Industry Association President Mark Lackritz. Testifying recently before a Congressional subcommittee, Lackritz argued that market information is now transparent.

That development, he added, "has facilitated the growth of an entire industry of market data vendors that add analytic information and news services to basic market information and sell it to market participants and others."

Individual investors, he argued, now have access to information that was previously only available to financial professionals.

Lackritz told a Congressional subcommittee that "granting new property rights in database protection legislation, no matter how well intentioned, will vest control of market information into the hands of a single source monopolies in the securities industry."

The Securities and Exchange Commission is studying the issue and is expecting a report from its market data advisory panel sometime this month. The securities industry – especially trading firms – has much at stake on this issue. It is estimated that both Nasdaq and the Big Board garner some $100 million in yearly market data revenue. But both organizations have contended that these funds are needed to offset the costs of self-regulation and the costs of market data collection.