A new generation of trading systems for Nasdaq market makers is hitting the Street. Whether it's a new version of the industry standard, BRASS, the in-house system at Salomon Smith Barney, a plugger from the U.K. or a couple of newcomers to the scene, all are bent on solving the problems brought on by new regulations and changes in the trading game.
Decimalization, SuperSOES, SEC Rule 11Ac1-5, and capacity increases are key drivers.
Below is a laundry list of some of the new features helping traders and their bosses cope. Systems and their owners are: SmartBrass by SunGard Trading Systems; Fidessa by royalblue; the Bloomberg Equity Order-Management System by Bloomberg; Tools Plus by Nasdaq Tools; and GATE by Salomon Smith Barney.
Big Brother
Big Brother is watching at firms that deploy SunGard's SmartBrass.
The OMS integrates with a brokerage's proprietary analytic system, giving management a picture of all positions entered into by all of the firm's traders.
Positions taken by BRASS traders are lumped together with those of other desks such as proprietary and derivatives where BRASS is not used.
Management gets a firm-wide view of its risk profile. The set-up also lets management change parameters on the fly. No longer is the Nasdaq trader solely in charge of his destiny.
With one eye on the firm's capital, management can make changes that affect position sizes intra-day.
For example, it can reduce a stock's automatic execution parameters from 1,000 shares to 100 if it chooses. Or, management can instruct BRASS to cease executing orders in certain securities against the firm's capital and route them out.
Agency Trading
Penny ticks are reshaping Nasdaq into an agency marketplace where traders represent customer orders rather than fill them from inventory. But agency prints can't be processed through the traditional principal accounts.
Buyside customers won't accept that. So, trading systems geared towards inventory accumulation and depletion need to adapt.
royalblue's Fidessa enables brokerages to match their orders with their executions. That's not as easy as it sounds, according to royalblue. A single trader may work several orders in the same security throughout the day for different customers.
It is nearly impossible for him to keep track of all the variables such as security, customer, time, price, quantity and order instructions. Matching fill with order requires a computer.
"When you execute, how do you know which order to send back if you didn't peel it off from that order to begin with?" asked Joe Chafatinos, an executive vice president with royalblue.
"Our customers want to be able to tie the execution to the order so they can treat it as an agency order," he added.
Compliance Officer's Dream
It happens. Sometimes, traders break the rules. Usually inadvertently, of course. Often because of fast-moving markets.
Bloomberg's new OMS – slated to go live at an unnamed brokerage this month – comes loaded with pro compliance features. If a trader has committed a serious violation, a pop-up window takes over his screen and forces him to act.
E-mails go out to desk heads and compliance officers as well. Less important alerts are color-coded or sent by e mail.
"We're almost not going to allow you to become uncompliant with certain types of orders," said Bob Coppola, head of Bloomberg's product strategy group.
Limit order display rules are taken seriously. If an order is not displayed by the trader in one-and-a-half minutes, for instance, then it is automatically displayed. The system will override the trader's own quote management. The parameters are set by management.
Where's the Depth?
Size at the inside is harder to come by now that trading is conducted in penny increments. A trader might find only 100 shares at the NBBO. True' depth may reside two or three levels below the NBBO. If a trader gets a relatively large order – say 1,000 shares – he would be hard-pressed to fill it at the NBBO. He'd incur an unwanted loss when laying off the position. What does he do? SunGard's SmartBrass includes a feature that will automatically take out all the quotes/orders at the top of the book until it uncovers enough size.
The system will then automatically execute the customer's order.
De-Fragging Nasdaq
Penny ticks have caused liquidity to disperse to more price points. That has traders clamoring to see every possible quote on the ECNs. Their NW II screens only display top-of-book orders from the liquidity-rich ECNs. The first OMS vendor out of the gate to consolidate all quotes from every Nasdaq market center is Nasdaq itself! Nasdaq Tools, formerly Tools of the Trade and now a Nasdaq subsidiary, has incorporated an ECN Consolidator' into its system, Tools Plus.
On one screen, traders get every quote posted by most ECNs and the NW II montage. Most, but not all. Some ECNs (Instinet is a notable example) have denied their distributors free access to their quotes. Tools Plus also consolidates quotes from the two OTC markets – the Bulletin Board and the Pink Sheets.
Drag the Book
If Greenspan cuts rates in a surprise move and the market starts going crazy, traders at Salomon Smith Barney can cope. Salomon's GATE lets them drag their entire book and instantly change every quote of every stock they trade. Or they can instruct it to buy 1,000 shares of everything, for instance. "You can do that quickly and easily to defend yourself against what's going on in the market," said Amit Chatterjee, deputy head of equities e-commerce at Salomon.
One Less Step
Now that SuperSOES is a reality, Nasdaq trading is faster than ever. So, traders need to be quicker on the draw. Bloomberg's new OMS cuts out a step in the trading process, giving traders faster access to the market, according to executives. Traders can sweep the Street or preference a particular broker from anywhere in the system. They don't have to first call up the security to run the function. Because the OMS includes a blotter that handles all their securities, traders can, at any time, click on any security and sweep the market. The blotter allows them to run all sorts of functionality from adjusting quotes to sweeping the market from anywhere on the system, according to execs.
Super Market Maker
royalblue's Fidessa allows market makers to double, triple or even quadruple the number of stocks they trade. Traders stay on top of their most active names in a primary pad while most of their stocks are babysat by the system in a secondary pad.
The secondary pad is run as much on auto-pilot as Nasdaq will allow. It will keep tabs on the difference between a trader's quote and the NBBO.
It will monitor which orders are on each side of the market. It will reflect his orders in his quote. It will automatically move away once an order is filled.
What it won't do is automatically refresh the quote to the inside. That's against the rules. Nasdaq doesn't want computers trading with computers. "You can't quite have a totally automated trader," said product developer Mark Ames. "Although, we'd love to write one." The point is to allow the trader to focus on the meaty side of the business, adds Ames.
That is where he will add value. The rest is mundane and better done by computer.
Super Market Maker II
Salomon Smith Barney's new GATE system was developed to facilitate a large ramp-up in capacity at the big broker. The firm was already making markets in about 1,000 names when planning for GATE began last summer.
Because trading activity in the next 1,000 stocks is not as lively as the first, it was felt a computer could do most of the work of a human trader.
GATE is effectively an automated trading assistant. The trader does not have to continually monitor his positions and executions in 100 stocks. He sets up a few parameters and GATE notifies him when his positions exceed a pre-set level. He can tell GATE to maintain positions within +1000 shares and -1000 shares, for example. He can tell GATE to never let him go short.
In addition, GATE will go out into the market to buy or sell stock. It can react to news or information faster than a human trader.
Best Execution
Thanks to the SEC, new execution quality reporting rules are now in force in the listed market and will soon be coming to Nasdaq. Market makers are under more pressure than ever to get a grip on the nebulous concept of best execution.
royalblue says it's trying to help with new features in Fidessa that let firms create strategies to achieve best execution. Still in development, the technology permits a unified approach to best execution that takes into account all available execution options, the rules governing the handling of customer orders, a firm's positions and prevailing market conditions. royalblue executives say most systems on the market only allow for a piecemeal approach.
A strategy might be as follows: If the desk is profitably long in a stock, it could automatically give incoming orders one-cent price improvement. But if it then becomes short, Fidessa can survey the market for the best price. It could choose to let the order sit in the new Primex price improvement system for 30 seconds to await an execution. If an execution does not occur there, the order could be sent to an ECN or elsewhere. Or it could be reflected in a trader's quote. "You want to be able to change your best execution strategy on an intra-day basis," said royalblue's Joe Chafatinos.
