CTOs walk the SIA Conference floor searching for new technologies, products aimed at compliance with Reg NMS zoomed to the top of their shopping lists. Despite speculation surrounding the fate of Reg NMS following Securities and Exchange Commission chairman William Donaldson's resignation on June 30 - and the naming of Christopher Cox as his successor -- the SEC published the final rule on June 9.
"It's all about the specialists and front-running," says one brokerage executive walking around the SIA show, referring to the catalyst for Reg NMS. "It's about time they become truthful," says the executive, who requested anonymity. Wall Street CTOs have less than a year to comply with the strengthened trade-through rule, which goes into testing next April with 250 Nasdaq stocks; the second phase takes effect across all stocks in July of 2006.
"As CTOs and CIOs look for things in a post-Reg NMS world, I think it's going to be driven by compliance needs," says Sang Lee, managing partner at Aite Group. The research firm estimates that the industry will spend $544 million over the next four years on IT projects to ensure that all market participants comply with Reg NMS.
"Compliance requirements are going to be much higher than they were before, and the market data is going to be a challenge for the industry," says Mark Clark, executive vice president of direct-market-access products at SunGard/BRASS. "From a compliance perspective, you'll need to show that where you placed the orders and where you went out to seek liquidity is compliant with the trade-through rule."
Then again, it's not clear exactly what impact Reg NMS will have on investment banks' technology spending. "The big impact is really going to be felt on the exchanges," says Joel Scotkin, president of financial technology consultant Random Walk Computing. The investment banks themselves already are doing a lot of traffic in electronic trading and algorithms, he notes. "NMS is sort of setting the ground rules for them so they can use all of the tools they have," Scotkin adds.
Under the tougher trade-through rule, market centers - exchanges, electronic communications networks and market makers -- are required to route an order to the market displaying the best price. But industry experts say that broker-dealers and buy-side institutions also are responsible for best execution and that this will spur the trend toward more smart order routing to pick the venue displaying the best price.
So, which technologies will help firms comply with Reg NMS? According to Jeff Brown, director of product development at UNX (booth 2020), an institutional broker based in Burbank, Calif., there are four key technology components that brokerage firms will need to comply with Reg NMS: connectivity to the various execution venues; low-latency streaming market data applications to handle high-frequency tick data; sophisticated order-routing software; and compliance tools.
"Perhaps most important, firms are going to need compliance infrastructure to store their order-routing decisions and routing actions for a lengthy time period to show regulators that you are meeting your Reg NMS compliance requirements," says Brown.
Many vendors exhibiting at SIA are honing in on Reg NMS compliance. For example, HyperFeed Technologies (booth 1427) is demonstrating Smart Order Routing Trading Technology, or SORTT. HyperFeed acquired the front end, which dynamically scans all equities and options classes, from Focus Technology in December. "That data shows you, from the time the order was entered, what the market was, including depth of book, and it shows you each step the order took," says John Margolis, SVP, transaction solutions, Hyperfeed Technologies.
As program trading and algorithmic trading become more pervasive, and more exchanges, such as the NYSE, adopt automated execution, there could be a massive amount of bids and offers to store. "From a CTO perspective, all of a sudden there's going to be a huge quote volume, and people are going to need to snapshot the market for compliance purposes that they routed the order to the best price," says Eric Goldberg, CEO at Portware.
Yesterday, SunGard (booth 2411) announced that it had teamed with Portware (booth 3305) so that brokers using the BRASS OMS can sponsor access to program trading and algorithms. SunGard will distribute a private-label version of the Portware Professional trade-management system, which will be hosted as a service bureau integrated into SunGard's BRASS OMS, leveraging SunGard's compliance tools and its smart order routing network.
Buy-side OMS vendor Charles River Development (booth 1760) announced that it has added 10 new embedded interfaces to equity algorithmic trading brokers, bringing the total to 14. Experts are predicting that algorithmic trading is going to accelerate in a post-Reg NMS world because it looks like it will be harder to execute large blocks of stock. "Reg NMS, as adopted, provides best execution for the orders shown at the top of book," says Brennan Carley, chief strategy officer and CTO at BT Radianz, the global extranet service. However, "If you want to move or accumulate a large block of stock, you're going to need to slice your orders and send individual orders to each execution venue," he says. This already is pushing up demand for direct-exchange feeds and for firms to colocate servers closer to the execution venues, explains Carley.
On Monday, BT Radianz announced Radianz Proximity, a new service that will host customers' program trading and algorithmic trading applications in Northern New Jersey, adjacent to the leading market data and execution venues in Manhattan.
Eying the explosion in algorithmic trading, Progress Software (booth 4104) is launching the Progress Apama Algorithmic Trading Platform to the U.S. market. Buy- and sell-side firms can use the Progess Apama platform to analyze multiple data streams and develop new algorithmic strategies that can be deployed in hours, rather than weeks, officials claim. This "contrasts with the traditional model of offering black boxes that someone else has written," says John Bates, a vice president of event processing products in Progress Software's Real Time Division.
Progress officials also feel the platform can be used to help exchanges as well as buy- and sell-side firms comply with Reg NMS. "The requirement [for Reg NMS] is to be able to monitor all the pools of liquidity and to be able to compare that in real time. That's one thing that real-time event processing technology is needed for," says Bates. 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