Buy-Side Traders Side with Nasdaq CLOB vs. ECN Linkages

As the industry debates the SEC's report on U.S. stock market fragmentation, buy-side traders seem to be leaning toward the Nasdaq's proposal for a Super Montage rather than informal linkages between the various electronic communications networks (ECNs). That view and others emerged during a recent TowerGroup conference, where head traders from two sizable buy-side institutions voiced their support for the central limit order book proposed by Nasdaq--dubbed the Nasdaq Montage. Those traders are opposed to the notion of a virtual CLOB, which would rely on linkages being created among the various ECNs and ECN portals.

Noting that more than 100 executions per day, per trader go through an institutional order desk, Leo Smith, senior vice president and head of global equity trading at Putnam Investments, said it was impossible to "micromanage a single order." That's why the mutual fund giant is "a big supporter of having a system that will link all these ECNs, ATSs and exchanges together." He said orders could be executed from different locations, but they need to be linked in some way, "whether it's a virtual CLOB or a hard CLOB," in order "to protect wherever your order ends up being represented in the market."

David Schiff, principal equity trader with State Street Global Advisors, agreed that he wanted to see all fragmented order flow consolidated, either through middleware or through a Nasdaq-like Montage system. However, the buy-side traders criticized Nasdaq's technology--specifically SelectNet--for freezing up over the past few weeks.

Meanwhile, Archipelago LLC's national sales manager, Michael Cormack, said it shared the full depth of its order book with Island, and pointed out that Tradescape.com had links to all nine ECNs. "Our goal would be to link really all ECNs in a similar manner. What we're building are linkages that we own outside of the Nasdaq SelectNet network, which can have horrendous performance," said Cormack. He said users could demand service, because the linkage would be maintained by Globecom, a network provider, via a service agreement.

Meanwhile, Omar Amanat, CEO of Tradescape.com, predicted that institutions--including mid-size money managers and quant desks--could take advantage of the different pools of liquidity by "layering on connectivity, liquidity and intelligent, smart order routing." Amanat said this would become more important as buy-side order flow becomes smaller and harder to execute over the next few years.

Indeed, the trend toward smaller executions is already happening. According to Rob Hegarty, research director for TowerGroup's investment management technology practice, the average size of an institutional trade on Nasdaq had dipped to 600 shares by last September, from 1,600 shares in January, 1997.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio