When Legent Clearing launched an execution service this past September, it was a sign electronic trading is spreading to smaller clearing firms, and that the Davids are competing with the Goliaths.
Omaha, Neb.-based Legent hired a team of 15 people to service clients, tapping Bill McGowan, a veteran of institutional trading, to run the business, called Legent Execution Services. "We consider it all part of the grand scheme of providing financial services," explains William Zelasko, Legent Clearing's president and chief operating officer.
While Legent is considered a "newcomer in the heartland with a niche in servicing small- to mid-size broker/dealers and (correspondents)," says Zelasko, it's branching out into the electronic-trading arena. Altogether, the firm is handling about 30,000 trades a day from the execution service and correspondent-clearing side.
Today, Legent Execution Services is routing orders from E*Trade, Ameritrade, TD Waterhouse and JB Oxford, using a service bureau - Beta System's order-routing network from Thomson Financial - to reach all destinations.
According to Robert Kirk, director of institutional electronic trading at Southwest Securities, there are about 70 to 80 firms offering this type of service. "The trading technology has given birth to a lot of smaller broker/dealers going after the institutional market for business, because the day-trading market has kind of died," he says.
Southwest Securities (SWS), a much larger clearing firm with about 225 correspondents, rolled out a new equity-trading technology and electronic-execution service a few months ago. Marketed under the brand name XPRT Trader (Xtensible Programmable Real-time trading), the service is based upon the Neovest platform.
Says Rick Benners, senior vice president of equity trading at SWS, "The basis of the product is to deliver to the institutional community - which could range from a hedge fund to money manager - a system that would provide charts, news, data, analytics, but more importantly to send order executions to any broker on the Street, ECNs, market makers, two-dollar brokers, straight to the floor at exchanges."
Neovest, a direct-access-technology provider based in Provo, Utah, operates a service bureau hosting the applications, and through two data centers maintains connections to the trading destinations. In addition, SWS is using SunGard and Savvis to backup its broker destinations. "Initially, SWS reviewed 31 trading systems and then settled on Neovest's software platform because it met the needs of 60 to 65 percent of the customers we touch every day," says Kirk.
The firm was "looking for a system that could aggregate multiple destinations, not only internally and for our market makers but for some of our customers," adds Kirk.
One goal was to give customers the ability to segregate, filter and determine whether there were more profitable trades they should make, says Kirk, who previously developed a similar execution service for Source Trade. (Source Trade was a branch office of Terranova, which was bought by ProTrader and then by Instinet.)
Barry Schrager, who runs Schrager Capital Management based in Montclair, N.J., has been using XPRT for about a year. "I use it as a front-end for quotes, charts, technical analysis. In addition, I use their search facilities to identify opportunities for transactions," says Schrager.
From an execution perspective, Schrager likes having direct access to ECNs. "Instead of going to a brokerage firm and the brokerage firm going through the ECN, you hit a button and you see your bid or offer on the screen very rapidly," he says.
Though Schrager doesn't use SWS (he would not name the firm he does use), he says, "They will interface with your clearing firm for you."
However, finding an electronic-trading platform that was compatible with Southwest's clearing system was not easy, says Doug Watson, vice president, institutional equity trading at Alamo Capital, a San Francisco-based broker/dealer.
"It was something we were looking for. We had to explore different avenues to get it," says Watson. "There were a lot of execution platforms, but they did not have clearing arrangements with Southwest, and there's some execution platforms that just aren't compatible with certain clearing companies," he says.
Watson uses Neovest for equity trades to access ECNs, as well as to see Nasdaq Level II quotes. While he works larger orders with two-dollar brokers, XPRT also gives him access to the NYSE trading floor via the DOT system.
Connectivity to ECNs is also proving important to Legent. "We just recently converted a correspondent that wanted a specific link to Archipelago," says Zelaski. "It allowed us to obtain the client."
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