How the Little Guy Is Striking Back
Competition in the order management business could become more intense because of improvements in a Nasdaq product.
The reegineered product, known as ACES, or the Advanced Computerized Execution System, is available free to order delivery firms. And it gives users more control over orders routed to them.
ACES, say Nasdaq executives, has come a long way since it was introduced in 1988. ACES links all Nasdaq participants. Indeed, Nasdaq has turned the product into an order delivery system for dealers, a system which is especially useful for small firms.
Today, small volumes from individual firms are not large enough to support the cost of installing BRASS, the SunGard Trading Systems' product, say some trading pros. A majority of Nasdaq orders are now routed over BRASS.
Execution Function
ACES has changed over the years. An automatic execution function was dropped in 1998 following the introduction of the order handling rules. Those rules encouraged Nasdaq participants to manage an open order file internally rather than on ACES.
"We removed the Auto-ex functionality within ACES making it the order delivery system that it is today," said Ron Lipof, an ACES product manager for Nasdaq in New York. (The anomalous "E" for execution, however, is still used, because the name ACES was trademarked. It is also used because the name is familiar to the some 140 firms that use the system.)
At the same time Nasdaq allowed routing in any stock, while providing market makers with greater control. This expanded function permits users to be selective about which customers can send them orders. Thus, there is improved electronic control of relationships.
There are several reasons why ACES could prove a hit, according to Nasdaq officials. The improvements have kept pace with evolving technology. ACES is said to be reliable. And, for its order entry users, it is free. "If you enter an order into an ECN, there is usually an access fee, but order entries into ACES are free," Lipof explained. "It is the market maker side that pays."
"This is because market makers thrive on order flow, but they will be selective about who they will pay for," he added. "We don't usually have day traders putting their orders on ACES."
Day traders are said to prefer ECNs because of the fast execution speed some of them provide. For broker dealers, particularly the big household names, there are three principal ways to get Nasdaq-listed stock orders to each other: via telephone, direct links like ACES, or via other routing networks. A broker dealer will usually have "profiles" programmed in his proprietary order management system, or a system purchased from BRASS, or else another vendor.
Agency [retail] orders for Nasdaq stocks that firms don't make markets in, or that they send to preferred market makers, typically go through ACES.
Allocate Orders
Brenda Blackard, head of equity trading for Davenport & Company in Richmond, Virginia, explains how her firm allocates orders and uses ACES. "We can go in from my market marker side in stocks that we make a market in, or through our trading system that lets us set limits on what we want," she said.
However, an order under 5,000 shares is usually routed through ACES and is executed automatically. But Davenport also uses direct hook-ups outside ACES with major execution firms such as Bernard L. Madoff Investment Securities, Knight Trading Group and others. "We like to touch orders over 5,000," Blackard said. "We do what's called shipping an order.' Without ever having to call somebody or using the Nasdaq terminal, I can send an order even over 10,000 shares via ACES to somebody we don't have a direct hook-up to, but who we know will do a good job."
Blackard says Davenport is very picky about where it sends orders. "I will never send an order to someone unless I know somebody at the firm," she said. "If I have a problem, I have to be able to pick up the phone and say, for example, you've been working on this order for two hours, but I really need to get it filled today. Tell me what I need to do."
If Blackard gets what she calls a "crummy execution," she wants to know the person she will call for help.
Direct links take a lot of maintenance, so Davenport is constantly changing its list. "I just had a case where the person at a firm I was doing business with got let go. I didn't know anybody else at that firm," Blackard said. Nobody at the firm called to introduce himself, so Blackard is no longer giving the firm any business. "If I'm sending you a hundred orders a day, and I got somebody who bought 100 shares and should of sold it, I gotta' have somebody I know to call to fix it," she said.
In addition to deleting the Auto-ex feature in 1998, Nasdaq has made the following improvements to ACES. Last October it enhanced the matching of orders and executions by matching open orders based on entry date, branch identification and sequence number, and the market maker/order entry firm relationship.
"This enhancement improves the controls of the process so that the possibility of open orders with similar characteristics being mismatched, something that occasionally happened in the past, never happens now," Nasdaq's Lipof said.
In November, Nasdaq added a feature that labels not-held orders on order instructions. The Nasdaq market also added an application programming interface (API). It allows firms to connect their in-house order management systems and their proprietary trading software to ACES. "With an API, they don't have to use our software to connect to our server; they can use their own," Lipof said.
The biggest change was probably the introduction of WebLink earlier this year. It offers access to ACES through a Web browser. In addition to receiving price quotations, WebLink also permits firms to send orders directly to their market maker's trading systems via ACES. This eliminates the need to use telephone or e-mail communications.
Better Connectivity
Although it was originally designed to assist smaller firms in distant locations, WebLink improves connectivity. For example, NWII, the Nasdaq terminal connection, can provide a link if a firm's direct communication is lost. "If my system is down, I can go through my Nasdaq terminal where I have ACES minimized on the screen so that I can just point and click when I need something," said Davenport's Blackard.
Actually, the firm's system did go down. "We were updating manually on our Nasdaq terminal," Blackard said. "We got a little swamped, but we were still able to function until our main systems were brought up again."
If for some reason, neither of these connectivity routes is working, a large firm could connect to ACES through WebLink, which is a comforting thought for an IT manager.
ACES has provided a way for smaller order management system vendors to challenge the big OMS systems, according to some industry officials.
These vendors facilitate the trading process, including the posting of quotations displayed to other network participants.
Adam Ross, the lead strategist for Bloomberg LP's order management product, says that ACES has made dramatic system improvements over the last couple of years. "They have allowed us to deliver an order management system that can compete with BRASS' B-Net" he said, referring to the BRASS OMS that many believe is currently dominant.
For its part, a SunGard spokesperson said its BRASS product is a trade order management system that enables users to route orders to external destinations, such as ACES. BRASS also tracks P&L for its broker dealer customers who run proprietary trading systems, a feature SunGard considers a strong selling point.
Grandma Charles
Users, however, cite one problem with ACES, which is that changed orders are reportedly sometimes lost. "Suppose Grandma Charles in Sarasota asks her broker to buy her 100 shares of Microsoft and the broker routes it through ACES to a large firm. Then she amends her order to buy 200 shares. The order can get lost," Ross said.
Blackard agrees, saying that this, in fact, happened to her. Still, both think that the fault is not with ACES, but with the receiving firm that may not have programmed its software to be completely compatible with changed orders. This is a problem at large firms that have massive systems, which are sometimes slow.
A Nasdaq spokesman, Wayne Lee, said that sometimes the recipients of amended orders routed through ACES, "are not able to process those amended orders because of issues at the receiver's end."
"ACES literally accepts and completes hundreds of amended orders every trading day," he added, "so we are confident that this problem does not lie within ACES."
