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Listen to Alois Pirker now

Addressing the audience at the Wall Street & Technology executive forum, Transforming Client/Advisor Interaction With Real-Time Information, Alois Pirker, analyst at Celent's securities and investments practice, covers enterprise strategies for meeting the demands of advisors and their clients. He discusses the information management initiatives necessary in order to balance personalized service and automation in the advising industry. Pirker formerly worked for UBS as associate director of investment solutions. The event took place on January 26, 2006 at the Reuters building in Times Square, New York and was sponsored by Microsoft.

Due to legacy systems at both the New York Stock Exchange and the American Stock Exchange, the Securities and Exchange Commission has given both exchanges more time to comply with the sub-penny pricing rule under Regulation NMS, according to a brokerage industry source and a Nasdaq announcement.

According to the brokerage source, the SEC has decided that the sub-penny pricing rule will go into effect as planned next Tuesday, Jan. 31, but that any NYSE-listed or Amex-listed securities would not have to comply until their legacy systems are taken off-line and the new NYSE Hybrid and AEMI systems are operating. This is necessary because the legacy systems are not capable of handling quoting and intermarket reports and providing orders in sub pennies, says the source. Because of technical issues, the industry source says, "The legacy systems in place at the NYSE and AMEX could not take traffic in more than two decimal points through the Intermarket Trading System, so those legacy systems need to be off line."

Tentatively, the new date for NYSE and AMEX compliance is June 29, which is the same day that Reg NMS implementation is scheduled to begin in 100 stocks.

Meanwhile, the rest of the industry is moving forward with the sub-penny pricing rule on Jan. 31.

According to a Nasdaq Trader Alert, sent out Thursday, Jan. 26, Nasdaq will implement Reg NMS sub-penny changes to the Nasdaq Market Center, Brut and INET on January 31, 2006. [read it here]

"However, due to readiness issue at the New York Stock Exchange and the American Stock Exchange, the Nasdaq Market Center will continue to quote in penny increments in NYSE and Amex-listed stocks trading below $1. The Nasdaq Market Center will round any sub-penny orders/quotes received in these stocks."

In other trading news, the week closed on an active note!

Pipeline Trading Systems LLC, an electronic marketplace for trading large blocks of stock, that lets buy and sell-side firms execute anonymously, scored another milestone in trading volume. On Wed., Jan. 24, Pipeline executed over 24 million shares, with an average trade size over 45,000 shares. [Read it here]

According to Pipeline's release, ninety-six percent of the shares traded within the best displayed prices nationwide. The previous record was 21.6 million shares, executed on Sept. 30, 2005.

BATS Trading Inc., located in Kansas City, went live today with its new ECN, reports CEO Dave Cummings in an email announcing the launch. "Trading volume was very light on the first day, but some subscribers have indicated they expect to ramp up their volumes next week," writes Cummings.

Cummings thanked the firm's associates and technical staff for their hard work keeping the project on schedule. BATS is currently working with a number of subscribers who are in the processing of connecting to the system, the CEO writes.

According to BATS' Web site, the ECN is seeking: U.S. broker-dealers that trade at least five million shares daily, that are connected to multiple ECNS and use algorithms to handle high trading volumes with low overhead. To get in touch with BATS, call 816-285-9900. [Go to: www.batstrading.com]

by Ivy Schmerken

Women used to say you can never be too rich or too thin. Well, that has been somewhat discredited. But in Wall Street these days, the belief is that you can never have too many ECNs. With new stock trading rules-Regulation National Market Structure (NMS)-officially kicking in by the end of June, broker dealers are hedging their bets to position themselves for a post-Reg NMS world.

Last Wednesday, the Wall Street Journal reported (subscription required) that Citigroup plans to launch its own electronic trading network this spring. This move follows Citicorp's acquisition of OnTrade, a wholly owned subsidiary NexTrade Holdings in Clearwater, Florida, and the hiring of Steve Randich, former CIO of Nadaq, notes David Easthope, analyst with Boston-based Celent.

NexTrade operates its ECN - Electronic Communications Network - through OnTrade, its wholly owned subsidiary. One source tells me that Citi is buying OnTrade for its ECN license and then plans to rebuild the technology.

The paper says that Citigroup will operate the new electronic trading network separately from its business of executing trades for clients. And Citi's ECN will be accessible to other Wall Street firms trading stocks, according to the article. Of course that opens a whole Pandora's Box of whether firms will feel comfortable using a competitor's ECN - an issue that Citi has already had to face with its acquisition of Lava Trading, a leading technology provider that operates a smart-order routing service bureau used by other sell-side firms and their buy-side clients.

Sources interpret Citigroup's move to offer a new ECN is a defensive move against the duopoly - the New York Stock Exchange and Nasdaq - raising prices charged to brokers. If you're a brokerage house in the stock trading business, you might want to go out and buy your own ECN rather than pay higher transaction fees to the NYSE and Nasdaq.
But isn't this overkill? Citigroup has already invested in the Philadelphia Stock Exchange last June and in the Boston Stock Exchanges' electronic trading ventures in August. Those investments, made in conjunction with other Wall Street heavy hitters, are meant to give the industry another alternative to the duopoly.

Because of all the uncertainty surrounding Reg NMS and how it's going to play out, brokers are investing in ventures that can help them generate market data revenues and avoid paying fees to other venues. But does the industry really need another ECN? As everyone knows, there were as many as dozen ECNs created during the late 1990s as Wall Street firms placed bets on electronic trading. Remember Strike, REDIBook, BRUT, GlobeTrade, Island, Attain and MarketXT? All of these ECNs have either merged with other ECNs or pulled the plug.

After a wave of consolidation and mergers, now there are only a few independent ECNs left as many have been acquired or simply gone out of business for lack of liquidity. Why let history repeat itself?

Standalone ECNs may not be viable judging from the fact that the two leading ECNS - Archipelago and INET -- are merging with the stock largest exchanges. The remaining independents are Track Data, Bloomberg Tradebook and a new start-up, BATS Trading. (Attain was acquired by Knight Trading). What's more, stock trading may not be enough. Bloomberg Tradebook ECN recently received SEC permission to offer options trading. On the other hand, this does not preclude Citi from expanding into other asset classes down the road.

One analyst thinks the Citigroup ECN is a smart move. “It makes sense for Citigroup to attempt to capture more of this trading and to provide an alternative venue to the existing ECNs, which are becoming indistinguishable from the exchanges due to mergers,” comments David Easthope, an analyst with Boston-based research and consulting firm, Celent, in an email last week.

In theory, ECNs should benefit from the new regs which require trading centers to route orders to the destination displaying the best price. If ECNs have the best price, other trading centers are obligated to hit them first. Then, ECNs could improve their internal match rates without having to route out and pay fees for taking another venue's bids and offers.

If that's the case, then other banks could form ECNs too, that is, if they want to undertake the technology risk. So when the question arises, do we really need another ECN?, a seasoned source replies, “You can never have enough.”

Listen to Philippe Bibi now

Philippe Bibi, senior managing director and CTO at Boston-based Putnam Investments, plans to focus on adding business value in 2006 (instead of spending a lot of time focused solely on regulatory compliance) by developing technology that can automate derivatives transactions and replacing parts of Putnam's legacy systems with off-the-shelf solutions. In fact, Bibi plans to add the similar levels of automation to derivatives transactions as Putnam has for securities trades. At the same time, Putnam is pushing forward aggressively with its move to a company-wide 64-bit architecture.

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Listen to Joe Gawronski now

Currently, financial services companies are scrambling to ready systems and processes for Reg NMS and the NYSE's planned hybrid exchange structure. However, Joe Gawronski, COO at Rosenblatt Securities, says that while it's important to be prepared, don't be surprised if implementation of both Reg NMS and the NYSE's hybrid model are delayed. In addition, Gawronski also discusses the role that algorithms and transaction cost analysis (TCA) will play in Rosenblatt's operations and how the specialty boutique firm will grow and change in 2006.

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Listen to Richard Rzasa now

According to Richard Rzasa, CIO at TD Waterhouse, in 2006, executives in the financial services industry have a decision to make: either tighten their own security, work closely with lawmakers and educate the public to increase online security, or risk having consumers move away from using the Internet for financial transactions and self-service. For firms looking to make quick security adjustments, Rzasa suggests such low-hanging fruit as removing links from e-mails, multi-factor authentication and educating customers about online security. In addition, Rzasa discusses the need for robust backup IT architectures to deal with increased electronic trading and the maturation of ASP/Web services as a viable strategy for financial firms.

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Listen to Robert Hegarty now

Bolstered by record profits in 2005, the securities industry may see an increase in consolidation activity in 2006, according to Robert Hegarty, managing director in TowerGroup's securities and investments practice. Both smaller financial firms and innovative industry-specific technology providers will be on the menu for many bulge-bracket firms in the coming year. In addition, Hegarty says firms may need to rapidly bolster trading infrastructure as trading volumes are set to explode and as new alternative investments increase the stress on the back office.

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Listen to Peter Horowitz now

Peter Horowitz, managing director, BearingPoint, says that in 2006 forward thinking firms that tackled regulation and compliance challenges in 2005 will be executing initiatives that improve profit margins and marketshare, including platform rationalization to reduce operating costs, globalization and reference data upgrades. IN addition, Horowitz says that the NYSE is actually "catching up" with the rest of the industry with its Hybrid model and that the NYSE will have challenges when it comes to giving equal access to liquidity to all participants (specialists on the floor and electronic order flow). Meanwhile, firms will focus on alternative investment products to improve profit margins, but will be hampered by older legacy systems that are not flexible enough to handle the newer products types.

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Listen to this podcast now

While Wall Street lives by the quarterly earnings call, executives are starving for a long-term vision, according to the soon-to-be-released "Financial Markets 2015" report (available April 1) from the IBM Institute for Business Value. Daniel Latimore, executive director, and Suzanne Dence, a senior consultant at the institute, share some of the report's findings with WS&T. In addition, during the next few years, financial firms will re-evaluate their definition of risk and how it is treated, transparency and speed will be the two main drivers for business, and transaction cost analysis (TCA) will increase the buy side's move to do more of their own trading.

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