In the past five years, direct-access trading systems have migrated from active day traders to buy-side institutions to small, independent broker/dealers. But are clearing firms the next link in direct access' evolutionary chain? Well, Trade Route Direct LLC -- a recently launched, service-bureau-based direct-access vendor -- is counting on it.
The privately-owned TRD is now attempting to reel in clearing firm clients by offering them the opportunity to private label the vendor's direct-access, front-end software, and then resell that software to their clearing correspondent clients. "We're going after the people in the clearing industry, because we are absolutely amazed with the lack of front-end systems they have," says TRD business development officer John Paul DeVito. "It makes perfect sense. There is a pie here, and they are only offering their (clearing correspondent) customers half the pie -- the back end, post-trade processing part."
DeVito says that "fully-disclosed" clearing firms, such as Fiserv and Donaldson, Lufkin and Jenrette's Pershing division, have thousands of clearing correspondent customers that may be interested in an integrated clearing/risk management/direct access package. "I think these entities have a captive audience ... (and) they can tell their customers that (TRD) is a system that you need to have on your front end because it will expand your competitiveness in the business," he says.
Fritz McCormick, an analyst covering institutional e-brokerage at the research and consulting firm Celent Communications, agrees with DeVito's assessment that the clearing industry is using antiquated front-end technology. Moreover, he says it makes sense for TRD to offer clearing firms the ability to private label its direct-access software. However, while emphasizing that it would be a "no-brainer" decision for most clearing firms to adopt direct-access technology, McCormick also says that TRD will have to face some significant technology obstacles to succeed in the clearing market.
"I think that the clearing market is going to be fairly difficult for direct-access vendors to get into technologically," he says. "The issue is how do you get these (direct access) systems installed and integrated into these massive clearing legacy systems that they have in place. I think it's going to be tough to do that."
To succeed, he says, TRD must offer clearing firms not only a "very good," FIX-enabled front end, but also a middleware component that can "easily integrate" TRD's order-routing system with the back-end systems the clearing firm is using. "The systems the clearing firms are using are very antiquated. They are completely mainframe ... and it is a challenge to connect to them," says McCormick.
Vic Tartaglia, the managing member of TRD, says that the vendor is currently holding talks with Fiserv. However, he declines to specify when a deal with that clearing firm will be finalized.
Via TRD's direct-access system, Tartaglia says, end-users can electronically route orders to an array of electronic communications networks, including Archipelago, Brut, Redibook, Island and Instinet. Customers, he says, can also send orders to the American Stock Exchange, the New York Stock Exchange's DOT system and the Nasdaq Stock Market's SuperSoes and SelectNet trading networks. In the near future, adds Tartaglia, TRD will also complete an interface to the trading engine of GlobeNet, a small ECN that specializes in small-cap stocks.