Having made inroads domestically, direct-access firms want fast and easy access to international markets.
They've conquered the active-retail-trader market, and, even in a weak economy, have sold their technology to many buy-side institutions. Now, facing potential market consolidation, the next frontier for direct-access trading-system vendors appears to be international connectivity.
Direct-access vendors, which have firmly established themselves as order-routing pioneers in the Nasdaq Stock Market in the United States, are increasingly trying to expand their connectivity to European stock exchanges. The move into Europe may be particularly important for some vendors since many direct-access firms are pondering consolidation as the U.S. economy continues its struggle to recover.
Fritz McCormick, an analyst covering institutional e-brokerage for the research and consulting firm Celent Communications, says that there is an increasing demand for "cross-border trading" in the United States. Therefore, he says, direct-access vendors - such as Interactive Brokers, Lava Trading and Townsend Analytics (TAL) - are making an "increasing push towards international connectivity."
Stuart Townsend, president of TAL, says that his firm will definitely expand its penetration into European markets in 2003. Specifically, he says that TAL plans to build electronic interfaces between RealTick - its flagship direct-access system - and the trading engines employed by the London Stock Exchange and Euronext Paris. After TAL goes live with those interfaces, sometime in the first six months of next year, the vendor's clients will have direct-order-routing access to nearly all of the major European stock markets.
Townsend says that order routing to European destinations already accounts for 10 percent of TAL's business. Today, he says, TAL clients can route orders to stock markets in Germany, Italy, Switzerland and Spain via RealTick. Interestingly, Townsend notes, the bulk of TAL's European order-routing business comes from European securities firms rather than from U.S. clients looking to send cross-border trades overseas.
Lexit Capital UK, a U.K.-based broker/dealer, is among TAL's European clients. But in contrast to TAL, Lexit uses RealTick to route orders from Europe to U.S. execution destinations - including electronic-communications networks, Nasdaq's SuperMontage and the New York Stock Exchange's Designated Order Turnaround system - on behalf of its customers.
Lexit, which has been a TAL client since 1999, offers a customizable version of RealTick to its European clients, which include investment banks and hedge funds.
Peter Kearns, chief executive officer of Lexit Financial Group, the parent of Lexit Capital UK, says that Lexit's clients continuously ask for access to more and more liquidity pools. Order-routing vendors that do not reach out to more markets, he says, may be swallowed up by larger players in 2003. "There will be further consolidation as we are already seeing in the ECN marketplace," he says.
Securities firms, he says, have an order-routing checklist that includes "speed, reliability and depth of book." Speaking of depth of book, or the ability to display multiple price levels from an array of liquidity pools, Kearns notes that a few of the largest direct-access vendors have morphed into hybrid firms - bundling comprehensive order routing with quote-management capabilities.
Lava Trading, launched in the fourth quarter of 2000, was one of the earliest - and most successful - adopters of the hybrid direct-access model. Lava, which currently accounts for roughly 20 percent of the order-routing activity in Nasdaq stocks, has a comprehensive quote-management application that displays the full depth of book from every ECN - as well as quotes from market makers, alternative-trading systems and regional exchanges that trade Nasdaq stocks.
Lava, of course, also provides order-routing connectivity to every Nasdaq liquidity pool, and recently launched a listed-equities version of its flagship Lava Trading Floor application. Via that system, Lava's clients can tap into the NYSE's DOT system and NYFIX Millennium, a listed-equities ATS.
Richard Korhammer, Lava's chairman and chief executive officer, says that Lava's integrated approach has helped the vendor build a high-profile client base that includes "15 of the top 20" largest investment banks.
Celent's McCormick says that Lava should be commended for its pioneering approach to direct access. "Lava has done a good job of extolling the value of (its) virtual montage, and it is picking up clients hand over fist," he says.
TAL, says McCormick, is among the other direct-access vendors that integrate order routing with comprehensive quote management - though its bids and offers don't run quite as deep as Lava's.
The direct-access vendors that will be the most successful in the future, he says, will be the ones that offer their clients an array of electronic-trading services. "Really what it comes down to is what you can do overall for your clients," says McCormick. "Just the ability to route orders is not, in and of itself, enough to bring clients on."