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Citi Makes Global Electronic Trading Push

Now that it has knit the Lava, ATD and Options Market Maker platforms together with its dark pool, Citi is taking its electronic trading platform to Europe, Asia and beyond.

Citi's global electronic trading group recently offered to pull back the curtain an inch or so to reveal how it has integrated the former ATD, Lava and Options Market Maker technologies into one electronic trading platform and how it plans to take the platform international, first into Europe and Japan and later into Hong Kong and Australia. Never one to say no to a visit with Wall Street executives (especially if it involves a field trip to Tribeca on a sunny late-summer day), we traipsed over to Citi's offices on Greenwich Street in Manhattan by the Hudson River and heard the pitch from Steve Swanson, cohead, global electronic trading, and Ravi Radhakrishnan, managing director, global head of equities technology. We also visited the large equities electronic trading floor, a subdued and orderly haven compared with the voice brokerages we've visited in the past.

Citi's equities and options trading businesses, including its newly aggregated electronic trading platforms, have won 14 percent of the market share in equities and 12 percent market share in options, Swanson reports. "Getting these components to work together and interact appropriately is providing better execution quality for ourselves and our customers," he says.

Swanson came to Citi from Automated Trading Desk, an electronic market-making and proprietary trading company that Citi bought in July 2007 for $680 million and is still based in Mount Pleasant, S.C. Citi had a small equities market-making business like ATD's at the time of the acquisition that was merged with ATD; ATD's technology and technique now form the core of Citi's global equities offering.

Horse-Betting Origins

ATD's algorithmic trading programs were initially developed by Dave Whitcomb, who taught finance at New York University and Rutgers University, and James S. Hawkes, a computer engineer and former College of Charleston professor, as a way to predict the outcome of horse races. Hawkes was one of Swanson's professors at the College of Charleston and hired the young math whiz to work at his software company.

Today Swanson distances himself from ATD's horse-betting origins. "That's very old, old history, " he says. "The firm was started in 1988, and two of the founders had some history of running regressions to predict horse races."

Swanson explains that today the ATD technology receives publicly available data from several exchanges, including futures and equities markets, analyzes hundreds of variables around each stock, and guesses whether each stock will go up or down, often in as little as 30 seconds. "We're trying to predict stock prices in the very, very short-term basis. Then we're making a market around that predicted price," Swanson relates, noting that ATD's customers are retail broker-dealers, online brokers and the traditional brokers. Smith Barney, for instance, is a large customer.

According to Swanson, the past year and a half have been good for this business. "The market itself has been a perfect storm for electronic trading -- high volatility and wider spreads as a result," he says. "As volatility increases, people reduce their risk by widening their spreads or participating less; functionally, spread is how the market pays you for taking risk. As volatility increased, spread increased dramatically, and it was a record year for anybody involved in the electronic trading space."

Second Piece: Lava Smart Order Routing

Citi acquired the second piece of its new electronic trading offering, the Lava electronic trading platform, in July 2004. The critical piece of the Lava technology, according to Radhakrishnan, is its smart order routing capability, called ColorBook. "Lava invented the space for smart order routing in the U.S.," he says. (Although many large firms were doing smart order routing before Lava came along, most were using proprietary technology; Lava was one of the first third-party smart order routing providers.) "It's very good at market access, at finding liquidity in the market at a given point in time. That's a global strategy for us now, and we're rolling it out around the world." One case in point: In July 2008 the Toronto Stock Exchange began offering ColorBook smart order routing to its members.

In late June 2009 Citi announced that it was replacing the LavaX execution management portion of Lava with TradingScreen's TradeSmart. The reason for this is that LavaX was a single-stock, U.S.-only product, whereas TradingScreen is a multi-asset, global system, Swanson says. "TradingScreen is much further along and more fully developed than our EMS," he reveals. "It made a lot of sense for us and our customers to make this transition and give our customers a more developed product at the end of the day."

At the time of the Citi/Lava merger, Wall Street & Technology Editor-at-Large Ivy Schmerken, in a story called "Will Citigroup Acquisition Spoil Lava Trading's Neutrality?," noted that "The acquisition immediately raised concerns from analysts who say the Lava Trading tools will no longer be regarded as broker-neutral because a broker will own [the firm]."

Asked about this issue, Swanson says he views best execution as the overriding consideration. "That's what we've focused on, and it's where we're providing competitive advantage for our customers," he says.

The other criticism on the Street about Lava is that it's expensive. Swanson counters, however, that "We're very, very price-competitive. I think we have the best prices out there currently." Citi issued new prices for executing brokers a few months ago.

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