INTELLIGENCE FOR THE ELECTRONIC MARKETS JUNE 2010

INSIDE:Anatomy of a Trading Floor:Exclusive photos of Lime Brokerage’sNew York trading floor. p.14

‘A Colossal Failure’: The heads of the topbanks should be fired for the industry’sregulatory woes, Larry Tabb says. p.37

GETCO’s new role on the NYSEfloor compels the buy side to interact with high-frequencyorder flow. Vanguard ChiefInvestment Officer Gus Sautersays he isn’t afraid of electronicmarket makers. p.20

A supplement to Wall Street&Technology

WORLDSCOLLIDE

A U B M T E C H W E B P U B L I C A T I O N

0610_01.qxd 4/30/10 4:23 PM Page 1

©2009, The Goldman Sachs Group, Inc. All rights reserved.

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contents

GETCO Crashes IntoThe NYSE FloorGETCO’s new role as a designated market maker on the NYSE floor compelsbuy-side firms to interact withhigh-frequency order flow —whether they like it or not.Is anyone likely to get hurt?

14 ANATOMY OF A TRADING FLOORFeaturing Lime BrokerageLime Brokerage’s proprietary tradingand hedge fund clients rely on thefirm’s high-speed market data,colocation, execution, and risk and compliance services for equities,options and algorithmic trading.It’s all supported on Lime’s downtownManhattan trading floor.

16 ALGORITHMIC TRADINGFIXing Algo DevelopmentA new extension of the FinancialInformation eXchange protocol thatpromises to drastically cut the develop-ment and deployment times of newand enhanced algorithmic strategies is a win-win-win for the buy side,the sell side and vendors.

26 TRADING TECH DIRECTORYTransaction Cost Analysis ProvidersWith today’s ever-fragmenting liquidityand increasingly sophisticated auto-mated trading strategies, getting themost efficient execution possible can mean millions of dollars in savings.Our latest trading tech directory fea-tures more than 20 top TCA providers,including details on their data servicesand the timing of their analyses.

37 STREET CREDFire Our Industry’s Leaders ContributingEditor Larry Tabb says the heads of all of the major banks are to blame for the industry’s regulatory woes and deserveto pay the price. Sacrifices to legislatorsand peace offerings to the global community must be made to ensurethe future of the financial markets.

20

14

16

“The fact that they’re using computer technologydoesn’t scare me,” says Gus

Sauter, Chief InvestmentOfficer, Vanguard.

June 2010

0610_05-06.qxd 5/4/10 10:47 AM Page 5

contents

10 MARKET INTELLIGENCEInstinet Bypasses the Sell Side toConnect Investors With CorporateManagement Instinet says its newcorporate access platform notonly automates the process ofmatching public companies withpotential investors, it also removesthe conflicts of interest long inherent in the traditionally sell-side controlled process.

Deutsche Dark Algo BalancesLiquidity With Market ImpactTo protect trades from gaming,the new Super X (“Cross”) algorithm can make the real-timetrade-off between securing liquidity and avoiding marketimpact, insists Deutsche Bank’s Jose Marques.

High-Frequency Trading Isn’t So Bad After All Despite the fear and skepticism surrounding high-frequency traders, HFT actually benefits the traditionaltrader, according to a newWoodbine Associates study thatexamined execution quality andvolatility from 2008 to 2009.

38 AT THE CLOSEHFT Firms Step Out of theShadows High-frequency tradingmay still raise the buy side’s rancor,but it’s the No. 1 source of liquidityin the U.S. markets, notes Editor-at-Large Ivy Schmerken. In responseto an SEC concept release, HFTfirms finally are stepping forwardto offer an unprecedented lookinside their strategies and provetheir legitimacy.

8 EDITOR’S LETTER

news opinions trading floors research videos

Peter DriscollVice President,

Senior Equity Trader Northern Trust

Michel DebichePresident and CEO Quantia Capital

Management

Brian FagenCohead of Liquid Market

Sales for the Americas Barclays Capital

Floyd ColemanU.S. Head Trader AXA Rosenberg

Tim OlsenSenior Vice President/

Head TraderICM Asset Management

Jason ValdezDirector of Trading

Rosenblatt Securities

Joan StackTrading Manager

Ohio Public EmployeesRetirement System

Rob ShapiroExecutive DirectorMorgan Stanley

Investment Management

Bryan KievitHead Trader

Accipiter CapitalManagement

Reader Advisory Board

6 June 2010 • www.advancedtrading.com • ADVANCED TRADING

advancedtrading.com

BLOGWall Street Hiring Again Hiring is back on the Street, with growing demand for risk managers and specialists in distressed debt.advancedtrading.com/blog/hiring

TRADING FLOOR PHOTO GALLERIESNYSE Amex Options View exclusive photos of the NYSE Amex options tradingfloor, which debuted in March and offers both electronic and open outcry equityoptions trading. advancedtrading.com/photos/NYSE-Amex-Options

RESEARCHHow Electronic Can Europe Get? While the U.S. has led the world in the adoption of electronic trading, Europe is quickly catching up, says Aite analystSimmy Grewal. advancedtrading.com/europe

INDUSTRY OPINIONCapital Markets Reform Our Way Woodbine Associates’ Matt Samelson shares his vision for financial reform across several levels.advancedtrading.com/woodbine

EMERGING FROMTHE DARKThis special digital edition ofAdvanced Trading examines life in the dark on Wall Street and sheds light on the strategies and TCA tools buy-side traders employ to illuminate dark pool executionquality and safely navigate theopaque venues. It also exploreswhether options trading is ready forthe dark and features our exclusivedirectory of dark pool operators.advancedtrading.com/digital-edition

0610_05-06.qxd 5/3/10 3:20 PM Page 6

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here is no shortage of controversy swirling around Wall Streetthese days. With Goldman Sachs in the hot seat and regulatorsintensifying the push for financial reform, it’s only a matter oftime before big changes hit the Street.

Of course, high-frequency trading continues to pique theinterest of regulators, and in April the SEC announced plans

to establish a large-trader reporting system to assess the impact of large-trad-er activity on the securities markets. The SEC defined the “large trader” asa person or firm whose transactions in NMS securities equal or exceedeither 2 million shares or $20 million during any calendar day or 20 millionshares or $200 million during any calendar month.

Meanwhile, the NYSE announced that GETCO, one of the biggest HFTplayers, had become a designated market maker (DMM) on the exchangefloor. While many see this move as an evolution of the market maker modeland an inevitable outcome of the increasing electronification of trading, some

buy siders are concerned about interacting with high-frequency order flow (see this month’s cover story,

“High-Frequency Trading Hits the Floor,” page 20).“It’s a mixed blessing,” says Jennifer Setzenfand, VP

and senior trader at Federated Investors. “I don’t likeit, but I do like the fact that they are opening them upto regulatory scrutiny.”

And if controversy is what you want, then controver-sy is what you’ll get with Larry Tabb’s column thismonth (see page 37). Tabb calls the troubles playingout on Wall Street “a colossal failure of leadership,”

and points to industry heads as perpetuators of the meltdown that grippedthe financial markets over the past year and a half. The only way to improvethe situation, Tabb argues, is to make sacrifices and peace offerings and workwith the global community to ensure the structural integrity of our markets.

But even at a time when controversy and regulation are dominating thefinancial scene, innovation still is occurring in the industry. The emergenceof the FIX Algorithmic Trading Definition Language (FIXatdl) as a standardis revolutionizing algorithm development and deployment for the buy sideas well as for the sell side and vendors.

As a side note, I wanted to acknowledge my first issue as Editor of Advanced

Trading and assure our readers that our coverage of electronic trading and thetechnology issues shaping the electronic markets will continue to meet thehigh standard set by Kerry Massaro when she launched this brand. If you haveany comments on our coverage or ideas for upcoming issues, please feel freeto e-mail me at cmceachern@techweb.com. I look forward to learning from youand sharing with you as this monumental year of financial change unfolds. ■

8 June 2010 • www.advancedtrading.com • ADVANCED TRADING

Volume 6, No. 3

VP/GROUP PUBLISHERJohn Ecke 212.600.3097 jecke@techweb.com

EDITORIALEditor Cristina McEachern Gibbs cmceachern@techweb.com

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Cristina McEachern Gibbs , Editor

TControversy Breeds Change

editor’s letter

0610_08.qxd 5/3/10 10:55 AM Page 8

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investors and public companies seeking a cash inflow.Buy-side firms are concerned about possible information

leakage in this arrangement, according to Dykens, whopreviously spent 10 years working on the buy side as a port-folio manager and trader and most recently was CEO of afinancial technology firm. “The portfolio managers don’twant to have the equity institutional salespeople listeningto the questions and the due diligence that’s performed, outof fear that the equity sales institutional salesperson willshare those insights with other clients,” he contends.

Further, the sell side may not introduce the rightinvestors to public companies, Dykens argues. “Theideal investor for the corporation is the firm that buys4 million shares of stock and sits on them for five years,”he says. “However, the best client for the sell-side firmis the client who buys 4 million shares today and sells4 million shares the next week.”

On top of these potential conflicts of interest, therealso has been an 84 percent head count reductionamong sell-side analyst research departments, accord-ing to Dykens, so there are fewer analysts followingfewer companies, leaving an information vacuum thatInstinet believes it can fill. “With our technology, the

for public companies that will completely automate and streamlinethe non-deal road show process,” says Mike Dolan, copresident ofMeet the Street, a new subsidiary of Instinet, Inc. “It’s a business thathas been completely ignored from a technology standpoint.”

In addition to automating what has been a manual task, accordingto Dolan, the platform also removes conflicts of interest from aprocess currently dominated by the large bulge-bracket firms, whoseinstitutional equity sales forces arrange the meetings between theirinstitutional customers and corporate management. Traditionally,fundamental investors, portfolio managers and analysts have viewedsitting down with the CEO or CFO of a company as an important partof the process of deciding whether to buy its stock, Dolan says.

“CEOs would like to meet with the portfolio managers,” he explains.“Putting these two in the same room is big money on Wall Street.”

Similar to its historical business of building liquidity pools, Instinetis creating a pool of portfolio managers who are interested in meet-ing with the management of listed companies. Portfolio managers canupload to Meet the Street watch lists of public companies with whichthey would like to meet, Dolan relates. When those companies arebooking a road show, they can send an e-mail or instant message tothe portfolio managers who have expressed an interest in meetingwith them. The investor then confirms with the public company,and the appointment automatically drops into his or her calendar.

“In a matter of seconds, they can have that booked and logged intotheir Outlook calendar,” emphasizes Dolan. “It creates huge effi-ciencies for the marketplace.”

Removing Conflicts of InterestBeyond operating efficiencies, Instinet says the Meet the Street plat-form also addresses the conflicts of interest inherent in the currentcorporate actions structure. Today, “The corporate actions processis really in the hands of the sell side since they have the investmentmanagers as clients,” relates Dan Dykens, copresident of Meet theStreet. This arrangement, Dykens asserts, hurts both institutional

nstinet is looking to give institutionalinvestors entree into the C-suite. The glob-al provider of electronic trading and agency-only brokerage services, Instinet isdeveloping Meet the Street, a new corporateaccess platform to automate the process ofmatching corporate management of publiccompanies with relevant investors throughan interactive web-based service.

“We are building an online web-based corporate access platform

10 June 2010 • www.advancedtrading.com • ADVANCED TRADING

market intelligence

IInstinet Skips Sell Side in ProvidingCorporate Access

Dan Dykens (l.) and Mike Dolan, copresidents of Instinet’sMeet the Street, say the web-based platform automates the corporate access model while removing sell-side conflicts of interest from the process.

0610_10-11.qxd 5/3/10 9:40 AM Page 10

company for the first time can reach out directly to theinvestor, without spamming them for requests for meet-ings,” Dykens notes.

According to Jonathan Kellner, president of InstinetLLC, “There’s a huge opportunity in the mid-cap andsmall-cap space of companies that don’t get as muchlove from the sell side as they used to. We’re leveragingthe technology to put the power in the hands of theinvestor relations officers to get a road show meetingwith the investors.”

Building a New ModelBut Instinet is just the latest agency broker to jump onthe corporate access business trend. ConvergExannounced in January a corporate access program, andLiquidnet launched its own program in June 2009, part-nering with NYSE Euronext to give corporate issuerscolor on how their stocks trade in Liquidnet’s electronicmarketplace. But Instinet argues that both of these pro-grams maintain the traditional workflow of a salespersoncalling up the corporate investor relations officers (IROs)and the buy side to arrange the meetings.

To change this model, Instinet has been developing itsweb-based platform for the past 15 months, Dykensreports. “We plan to reach out to hundreds and hundredsof corporations,” he says, noting that he’s been in constantcontact with IROs, “asking, ‘What do you need, and howcan we build something that was easy to use?’ ”

Adds Dolan, who joined Instinet in 2000 and has man-aged both the U.S. independent third-party research andsales efforts at the firm, “Right now we’re in the processof disclosing the new platform to our client base.” Hesays Instinet is starting to collect interest lists and e-mailand IM addresses from investors.

Meet the Street’s launch will be driven by the investorcommunity’s use of the platform, according to Dolan.As it reaches a critical mass of liquidity in various cities,Instinet will open those markets to the corporate chan-nel to start facilitating meetings, he explains.

In terms of fees for Meet the Street, Dolan notes thatthe service traditionally is a bundled product — buy-side firms compensate the broker through the tradingdesk. “They may want explicit pricing if they want a listof meetings, which they price out and pay with via theirclient commission arrangements or soft-dollar accounts,”he says, adding that the buy side pays only for the meet-ings that take place; there is no charge for analysts orportfolio managers to join the network.

To help corporate IROs automate the process, the plat-form integrates access to Expedia.com for booking travel,a concierge to answer questions and GPS capabilities toorganize appointments with clients by location. “The effi-ciency story is baked in,” says Kellner. “We wouldn’t get intothe space in a me-too way. We think our offering is unique,and that’s why we’re entering it.” ■ —Ivy Schmerken

ADVANCED TRADING • www.advancedtrading.com • June 2010 11

eutsche Bank’s AutobahnEquity electronic trading busi-ness has launched its newSuper X (Super Cross) algo-rithm to improve access to

dark liquidity for its clients. The algorithmaims to avoid adverse selection and limittrade footprints.

“Super X is suited for any time you want tosee liquidity in dark pools,”says Jose Marques,head of equity electronic trading in DeutscheBank’s global markets division.“The algorithmdetermines a subset of dark liquidity sourcesunique to each order that evolves in real timeto control information leakage.”

Deutsche Bank “wanted to empower itsalgorithms to be the true execution agentsthat can make the real-time trade-offbetween liquidity and impact,”Marques adds.“Super X accomplishes this on millisecondtime scales by using statistically driven mod-els that look across securities and venues.”

In a March 2010 white paper entitled“Smart Liquidity for Dark Pools,” DeutscheBank describes Super X as having “two quan-tifiable components: a dark pool rankingmodel that determines a fitness for purposeof every dark pool for each trade, and adynamic return model that is designed toeffectively protect trades from ... gamingtechniques ...over the entire life of the trade.”

According to the paper,“The core of Super X is a sophis-ticated dark pool ranking model that profiles dark poolsbased on transaction cost,statistically determined compat-ibility for each order, client order attributes and real-timemarket conditions. This allows users to interact only withdark pools selected by the model.”

Additionally,“Super X uses a dynamic return model withuser-specified tolerance levels so that disadvantageousprice points can be determined and trading is temporar-ily suspended until the price levels move back withinexpected ranges.”

Simmy Grewal, an analyst with Aite Group in London,notes that the Super X algorithm is hitting the Street at a timewhen the buy side is struggling with increased fragmentationof liquidity. “Super X helps to solve this problem by usingreal-time input to direct flow toward liquidity pools andallowing customers a high level of customization,”she says.

Super X, which is fully integrated with DeutscheBank’s smart order router, is available in both the UnitedStates and Europe. According to the bank, there are nofunctional differences in how the algorithm operates inthe two regions. ■ —Lee Delaporte

D

Deutsche Dark AlgoBalances Liquidity With Market Impact

Super X“canmakethe real-timetrade-offbetweenliquidityandimpact.”—Jose Marques,Head of EquityElectronicTrading,Deutsche Bank

0610_10-11.qxd 5/3/10 5:00 PM Page 11

12 June 2010 • www.advancedtrading.com • ADVANCED TRADING

market intelligence

midpoint the execution occurred. Realized spread,or the movement of a security price after execution,also was analyzed.

“We looked at that data on a monthly basis andfound that [over time] 76 percent of the names’ exe-cution quality improved on average and in 67 per-cent of the names volatility decreased,” Samelsonrelates. As a result, portfolio managers and traderson average were able to retain more of the invest-ment return resulting from trading — moving in orout of a name — as high-frequency trading activityin the markets increased from the start of 2008through the end of 2009.

“One of the big unfounded criticisms from high-frequency-trading detractors is that it makes it hard-er for these traditional investors to trade and hasbeen detracting from execution quality,” Samelsoncomments. “And we generally don’t see that.”

Pinning Down HFTThe data was further broken down to help identifyand define high-frequency trading activity and notethe different styles. “High-frequency trading is astyle of trading that involves the use of technologyand algorithms and normally involves large-scaleturnover of very small positions,” according toSamelson. “If you’re a high-frequency trader, youare interested in speed, and you’re out there usingmarketable and limit orders,” he adds, noting thatthe report specifically analyzed these order types.

The strategies associated with high-frequencytrading, according to Samelson, include index arbi-trage, pairs strategies and other directional strate-gies that involve betting on a security’s performanceby either buying or selling it. There also are marketmaking strategies or net rebate maximizationstrategies that involve both buying and selling thesame security.

“We’re using our background and knowledge ofhow the market works and how different types ofparticipants react to come up with the framework,to make evaluations based on what the numberstell us and conclude who it’s been beneficial for,”says Samelson.

The data used for the report was pulled from theRule 605 data mandated for release by ECNs,exchanges, brokers and others on a monthly basisfor displayed limit orders and marketable orders. ■

—Cristina McEachern Gibbs

espite the uproar over high-frequency trading, including buy-side concerns over HFT player GETCO’s new role as a desig-nated market maker on the NYSE floor (see “High-Frequency

Trading Hits the Floor,” page 20), recent research asserts thatthe controversial trading style actually has benefitted the overall mar-ket. According to Woodbine Associates’ new report, “High-FrequencyTrading: The Impact of High-Frequency Strategies on Spreads andVolatility in Highly Liquid U.S. Equities,” high-frequency trading hasimproved execution quality and reduced volatility, enabling the tradition-al investment trader to benefit from reduced execution costs andincreased alpha preservation.

Matt Samelson, principal and equity market analyst at Woodbine andauthor of the report, notes that while many have questioned whetherhigh-frequency trading negatively impacts the “traditional trader” —whom he defines as an institutional, retail or proprietary broker-dealertrader — the evidence shows otherwise. Woodbine evaluated trade datafrom 2008 and 2009 on the 40 most-liquid stocks in the U.S. equity market.“These were effectively all large-cap securities, and we created an analyt-ical framework where we could split up the different types of traders with-in the market,” explains Samelson.

Two separate metrics were applied to the data, he says. The studylooked at affected spread as the measure of execution quality — exam-ining the National Best Bid and Offer (NBBO) and how far away from the

D

High-FrequencyTrading BenefitsTraditional Trader

“One of the big unfoundedcriticisms fromhigh-frequency-trading detractorsis that it makes it harder for these traditionalinvestors to trade.”—Matt Samelson,Principal and Equity MarketAnalyst, Woodbine Associates

Craig Lax is the head of ConvergEx’s electronic trading business. The “Anatomyof a Trading Floor”feature in the April issue of Advanced Trading misidentified his role.

Correction

0610_12.qxd 5/3/10 9:36 AM Page 12

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ime Brokerage’s trading support and operationsstaff work on the firm’s New York trading floor tohelp customers utilize the firm’s equities, optionsand algorithmic trading platforms and monitormarket center connections. While no tradingtakes place on the floor, it is the nerve center ofthe low-latency technology infrastructure that

the agency broker provides for high-frequency traders. Manyof Lime’s clients colocate their algo devices in Lime’s JerseyCity, N.J., data center. “We ... offer fast market data, risk aggre-gation and execution routing, as well as compliance monitor-ing and pre-order validation,” says Lime CEO Jeffrey Wecker.

The firm also recently launched LimeInside, a pre-tradeorder validation and risk monitoring service for the colocat-ed, sponsored-access space. “Assuming the SEC is going tooutlaw ‘naked access,’ customers ... are going to have to gothrough some order validation system optimized for exchangecolocation,” says Lime director of operations John Jacobs.

Featuring:

Jeffrey Wecker (above), president and CEO of Lime, over-sees the firm’s expanding business.The agency brokerageoffers colocation services through its data center in JerseyCity, N.J., and also runs a development center in Waltham,Mass., where it builds its trading and market data solutions.Lime opened an office in Chicago recently to expand thepresence of its newly developed options platform and justopened a Dublin-based European broker-dealer.

Photography by Stephen Aviano

Reported by Ivy Schmerken

LLime Brokerage

anatomy of a trading floor

0610_14-15.qxd 5/3/10 5:37 PM Page 14

ADVANCED TRADING • www.advancedtrading.com • June 2010 15

Johan Sandblom (above), assistant VP client trading support, tracks all of Lime’s equity marketconnections using a proprietary program, MonAp (short for,“Monitoring Application”), housed on the screen in the middle of his desk.“We track every market center,” he says. According toSandblom, clients call with questions about market hours, features on Lime’s system and variousorder types.To stay on top of where stocks are trading, Sandblom watches a six-month chart forequities and futures on his left-hand screen.“This is to know what’s going on in the market, ...for us to have knowledge when speaking to the client,” he says.

advancedtrading.comTo view additional photos of LimeBrokerage’s trading floor and read moreabout the firm’s technology, visitadvancedtrading.com/photos/lime.

Operations and TradingSupport (left): Divided intothree groups, Lime’s tradingfloor houses 11 employees inthe customer support andclient service group (at back);the trading desk, which is located in the middle of thefloor; and the technical opera-tions group (at front).The clientsupport group sets up newaccounts and deals with general customer administra-tive issues that are not tradingor technology related.The trading desk comprises threegroups:The core part of thedesk services high-frequencytrading customers using Lime’sequity trading platform, saysdirector of operations JohnJacobs. In addition, two salestraders work with customersutilizing algorithms, and a thirdsales trader covers options,which Lime currently is rollingout. Lime’s technical operationsstaff are “experts in workingwith databases in electronic trading,”Jacobs says, adding,“They speak FIX.”

Maura Terra (left), assistantdirector of operations, runsthe day-to-day operations ofclient support, trading andtechnical operations, andmonitors all internal e-mailgroups (center screen).She makes sure e-mails areanswered and drafts notifica-tions to customers.“I getupwards of 500 e-mails aday,”Terra relates. Lime hous-es an administrative databaseon the trading desk to pro-vide access to all of its cus-tomers’ account information.

Once a sale closes, the client support group(left) takes over. “Seventy-five percent of what theydo is new accounts,”says Terra.This includes every-thing from providing documentation and fundinginstructions to open an account with Lime’s clear-ing broker to suggesting which equipment to buyand colocating servers in Lime’s data center.

0610_14-15.qxd 5/3/10 5:37 PM Page 15

or add a parameter, and I have to go rebuild and testand go through the whole process again.”

Using FIXatdl, however, the broker can providethat same information around algorithmic strate-gies — parameters, characteristics and rules — in aformat that is machine-readable. According toAtwell and other market participants, this dramati-cally cuts down on the time and costs associatedwith deploying new or enhanced algorithms.

“It allows the person building the software tobuild the rendering, and then it dynamically renderson-screen,” Atwell relates. “Then, once you fill outthe screen, what comes out is the same FIX mes-sage. Adding a new broker and its suite of algo-rithms, or adding a new strategy or parameters,has become easier than if I had to go reprogramindividual screens.”

trade communication language is beingextended specifically to deal with algo-rithms and shorten the time it takes todeploy new strategies.

The FIX Algorithmic Trading Definition Language(FIXatdl) provides firms that receive orders with a stan-dard way to express those orders. Orders built withFIXatdl then can be sent easily from traders’ systems todestinations via the FIX protocol.

Many buy- and sell-side firms, as well as vendors,already are moving forward to incorporate FIXatdl intotheir algorithm graphical user interfaces or renderingengines. Version 1.1 launched in March. For broker-deal-ers in particular, the process of updating and getting newor enhanced algorithms to buy-side clients reportedly hasbeen trimmed from months to days, and even overnight insome cases, with the use of the new FIX standard.

“The way brokers historically supported algorithmictrading with FIX was that they created a suite of specif-ic algorithms; each strategy has a set of parameters, andeach parameter has a particular data type, such as char-acter string or number price,” explains Scott Atwell,manager of FIX trading and connectivity at AmericanCentury Investments and cochair of the FIX global steer-ing committee at FIX Protocol Limited (FPL). “Brokershand someone like me a large Word document or PDF orExcel file that contains all the strategies and parameters,... and I have to [program] that. Then they go and change

he Financial InformationeXchange (FIX) protocolhas been providing a wayfor firms to exchangereal-time trade informa-tion related to globaltransactions and marketssince the early 1990s. But now the mainstream

Buy-side firms, broker-dealers and vendors are getting behind a newFinancial Information eXchange protocol for deploying algorithms fasterand more cost effectively.

16 June 2010 • www.advancedtrading.com • ADVANCED TRADING

TA New FIX forAlgo Trading

“If you’re a brokerand you want totrade with us, youneed to use FIXatdl.”—Scott Atwell, Manager of FIX Trading andConnectivity, American Century Investments

algorithmic trading

By Cristina McEachern Gibbs

0610_16-18.qxd 4/30/10 11:36 AM Page 16

Atwell describes the adoption of FIXatdl as a “win,win, win,” explaining that brokers can get their algo-rithms to customers faster, OMS and EMS vendorscan implement ever-changing sets of algorithms withminimal programming, and the buy side gets fasteraccess to new and innovative trading strategies. But heacknowledges that there was quite a bit of work doneup front by the vendor and user communities on devel-oping the rendering interface, the browser that dis-plays the order entry screen. But, “Once you’ve donethat,” Atwell relates, “it is universal for whatever bro-kers you get updates from and also supports addition-al brokers within the same capability.”

American Century, Atwell notes, is taking the stan-dardization one step further, working on an opensource rendering engine that his team will embed inthe firm’s proprietary order management system(OMS). He adds that with the OMS and FIXatdl workthat American Century has done, the firm has beenable to cut the algorithm programming cycle from acouple of weeks to a day or less, depending on coun-terparty testing and certification.

“You still have to test the algorithms, but I don’t haveto program code, recompile code, then test, programagain and retest,” Atwell says. “If a broker has 12 algo-rithms, I would go through a test script that tests fourto eight cases for each one, and that can take hours.[Now] our brokers can test their files they’re going togive us ... and see what it looks like before they send itto us, which cuts down on some of my work.”

The Road to Acceptance Despite the benefits, FIXatdl acceptance didn’t happenovernight. Rick Labs is considered a pioneer and majordriving force behind FIXatdl. He traces his work backfive years to the beginning of an effort around FIXand algorithmic trading.

Looking back, says Labs — who now serves ascochair of the algorithmic trading working group atFPL and also is a managing member of CL&B CapitalManagement — broker-dealers initially were reluctantto share their intellectual property around algorithmspecs. “Their trading edge was expressed in algo-rithms, and they differentiated themselves with thosestrategies,” he comments. “So a prior request to bro-ker-dealers to send into FPL their comprehensive algo-rithm specs did not get a lot of responses.”

But the broker-dealers soon became concerned withthe amount of time it took to get their trading jewelsout to customers, and they became increasingly inter-ested in automating the process, according to Labs. Yetthe sell side “knew the buy side was represented by thetech vendors,” he adds.

So Labs and his working group reached out to aboutfive “top-ranking OMS system vendors,” he relates. Out

of that effort, the group came up with some initialrequirements and a widget library. “It was a series ofcontrols, or widgets — like a drop down box, a checkbox, a label, etc. — that everyone could understand andnot have it be dependent on any kind of programminglanguage,” Labs explains, noting that these tools repre-sented various strategy options, such as start and endtimes. “It took a long time expressing different strate-gies and finalizing the standard library of widgets, butthat was gradually rolled up into version 1.0.”

Taking into account the OMS community’s needs,the working group then went back to the broker-deal-ers. The first version of FIXatdl, version 1.0, wasreleased in 2008 with 15 brokers providing samplealgorithmic files. According to Labs, the broker-deal-ers shared only their most-common strategies, but itwas enough to create the template schema for FIXatdl.

When the first version went out to the OMS commu-nity, the working group gained a lot of valuable feed-back — the industry’s real needs were uncovered andthe group found that the devil was in the details. “Wehad to remain industry-neutral in our corner and sayeven though something was working in [one vendor’s]environment, it may not be universally acceptable toall other entities, so adding all the features the OMScommunity desired took some time and was a delicatebalance,” he recalls.

Adds Atwell, “As things moved along, OMS ven-dors identified additional needs and gaps, andenhancements were identified. The latest version —1.1 — represents a significant improvement with bet-ter strategy valuation, enhanced strategy filtering andforeign language support.”

Labs explains that the algorithms can be expressedin any language — in fact, a Kanji Japanese language

ADVANCED TRADING • www.advancedtrading.com • June 2010 17

“Even thoughsomething wasworking in [one vendor’s]environment,it may not beuniversallyacceptable.”—Rick Labs, ManagingMember, CL&B CapitalManagement

0610_16-18.qxd 5/3/10 10:09 AM Page 17

18 June 2010 • www.advancedtrading.com • ADVANCED TRADING

version already is in use. “Each trader sees the strate-gy in his or her native language. ... It’s not a lot of effortto have different local versions,” he relates.

“From our standpoint, if you’re a broker and youwant to trade with us, you need to use FIXatdl,”emphasizes American Century’s Atwell. “Otherwisethings sit on my to-do list for a long time. When thetask becomes easier, it gets done.”

Atwell adds that the brokers are listening and are com-mitting to using FIXatdl. “We have complete files from ahandful of brokers and are already testing,” he says.

But different buy-side firms have approached theiruse of FIXatdl differently based on their workflow,according to Atwell. For those that trade and stage theirorders in the EMS, he explains, they only need theirEMS vendors to support FIXatdl. But some buy-sidefirms trade directly from their OMSs, which then needto be FIXatdl-compliant. Still others stage their ordersin their OMSs and then move the orders to their EMSs,in which case both vendors need to support FIXatdl.

Accelerating Algo LaunchesJohn Goeller, managing director of global executionservices at Bank of America Merrill Lynch, gotinvolved with the FIXatdl effort from the broker-deal-er side about three years ago. He says he was interest-ed in exploring the challenges the sell side was facingwhen integrating algorithms within buy-side OMS andEMS platforms. “We were looking into how as anindustry we could create a message format strictly foralgorithms. However, we realized that the best way toattack the challenges around algorithmic integrationwas to standardize around a common user interface

format, and FIXatdl was born,” he relates.“For us, it means less back and forth and less analy-

sis involved in creating and distributing our algo-rithms,” Goeller continues. “As a broker-dealer, it’spretty straightforward to take what we define for analgorithm in a Word document spec into FIXatdl withsome work around managing and maintaining. Thereal work is the ability to take these files in from dif-ferent broker-dealers and digest them into the OMS orEMS and display the order ticket.”

Goeller stresses that while it typically might havetaken Bank of America Merrill Lynch four weeks to sixweeks to push a new algo spec into production,FIXatdl has cut that time dramatically. “It doesn’t takeaway from the testing and certification we would stillneed to do to get the spec implemented and the mes-sages flowing, but with the communication in a stan-dardized format, there is less work. We deal witharound 20 or 30 different vendors, and this could short-en the time for algo implementation to one or twoweeks, depending on scheduling,” he says.

“Most of the major broker-dealers can support theformat today, and many OMS and EMS platforms haveplans around it or are using something similar. Butthe work is greater on their side, and the adoption isgoing to be a bit slower,” Goeller adds.

Labs points to Nomura as another broker-dealerthat is working hard to advance FIXatdl and namesPortware, RealTick and Ullink as vendors that are tak-ing a leadership role in promoting the standard.

As an indication that demand for this type of standardis high, Goeller points out that about twice as manypeople as usual attended the quarterly FPL meeting atwhich FIXatdl version 1.1 was officially launched. Heinsists the future of FIXatdl is bright, especially as itmoves into other asset classes and more-complicatedalgorithmic strategies, such as pairs or complex optionstrading. The FPL algorithmic trading working groupcontinues work in both of these areas, Goeller notes.

CL&B Capital Management’s Labs says FIXatdlalready is indicating its value across asset classes. “Forexample, when you have a cross-asset order — say,fixed income securities plus an interest rate future —with FIXatdl it’s no problem to render it on the screenand send the message to the broker,” he explains. “Atthe broker, though, they still have to take the instruction,break the order down and execute all of the elements,then collect the results and send back to the customer.”

Labs cautions, however, that technology may be get-ting ahead of the trader. “Some of these advanced algo-rithms blur the lines between portfolio managementand trader, which creates organizational challenges,” henotes. “Trading can only move as fast as the people candigest the technology. [FIXatdl] opens the door butdoesn’t give traders any more human capabilities. It’s agreat enabler and clears a wide path for innovation.” ■

algorithmic trading

“It meansless back andforth and less

analysis involvedin creating and

distributing our algorithms.”

—John Goeller,Managing Director

of Global Execution Services,Bank of America Merrill Lynch

0610_16-18.qxd 4/30/10 11:24 AM Page 18

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hen NYSE Euronext announced in February thatGETCO, one of the biggest players in high-frequen-cy trading, would become a designated marketmaker, or DMM, on the New York Stock Exchangefloor, the news immediately became a hot topicamong both the buy- and sell-side communities. Asa DMM (the revised term for an NYSE specialist),GETCO posts bids and offers in 350 NYSE stocks.The firm, which officially assumed the role in April,

rolled out about half of the symbols within the first two weeks. As a major proprietary trading firm, GETCO has commanded a certain mystique.

Now, however, the closely guarded firm known for its electronic market making hasdecided to play an important, very public role at a brand-name exchange. But giventhe controversy swirling around high-frequency trading and the intense SEC scrutinythe trading style has received in the past year, the news about GETCO’s new DMM status has raised concerns among buy-side traders.

20 June 2010 • www.advancedtrading.com • ADVANCED TRADING

W

HIGH-FREQUENCY

TRADING

HITS THE FLOOR

cover story

Tensions are mounting as GETCO’sarrival on the NYSE floor as a designatedmarket maker intensifies buy-sideconcerns about interactingwith a high-frequencytrading firm.

By Ivy Schmerken

>>

0610_20-25.qxd 4/29/10 4:25 PM Page 20

“If they’re making amarket for me, and it’s a tight bid-offerspread, the fact that they’re usingcomputer technologydoesn’t scare me.”—Gus Sauter,Chief Investment Officer, Vanguard

0610_20-25.qxd 4/29/10 4:25 PM Page 21

“We’ve always viewed ourselves as a market maker,and this DMM opportunity is another extension of ourcore business,” explains Dave Babulak, a managingdirector at GETCO. “That’s the core of our business.The vast majority of our orders are passive liquidity.”

Change Is ComingWhy did GETCO, a global electronic market maker inall asset classes — including equities, fixed income,futures and commodities in the Americas, Europeand Asia — decide to become a DMM with a floorpresence? “These opportunities are rare,” saysBabulak, who explains that the firm bought a chunkof the former specialist LaBranche’s business from

Barclays. “This is an opportunity to make markets ina different market structure.”

With 22 percent market share, the NYSE constitutesthe biggest pool of liquidity in NYSE-listed stocks andone with which a computer-driven trading firm such asGETCO wants to interact. GETCO already was anelectronic market maker in U.S. equities on BATS,Nasdaq and NYSE Arca, as well as a supplemental liq-uidity provider, or SLP, in 500 NYSE stocks. Some mar-ket participants argue stepping up to the DMM rolewas the logical next step.

“It’s a high-profile role,” says Joseph Mecane, EVPand chief administrative officer for U.S. markets atNYSE. From the exchange’s perspective, “GETCO isour largest SLP — they had experience with our mar-ketplace, and the DMM evolution is just really the nextstep in growing with the NYSE model,” he explains.

“GETCO is obviously a large participant in the mar-ketplace,” Mecane adds. “As they look at additionalways to get involved in the marketplace, our model isan attractive model for them.”

The liquidity GETCO supplies to the market is apositive for issuers and the NYSE, Mecane continues.“They have insight into stocks,” he insists. “We thinkthey’ll be able to make tight markets on their plat-form, which is good for investors.”

About a year ago, the NYSE revised its market mod-el to add value to the specialist role and introduced the

22 June 2010 • www.advancedtrading.com • ADVANCED TRADING

cover story

he New York StockExchange’s ability toattract GETCO as a desig-nated market maker, or

DMM, is a testament to the bigchanges the exchange made overthe past two years to revive its market model and speed up its tech-nology. As part of the effort, the NYSEeliminated the specialist functionabout a year ago and replaced it withthe DMM role, paving the way for anew breed of electronic market maker, such as GETCO, a high-frequency proprietary trading firm.

While designated market makersstill are the primary liquidityproviders on the NYSE floor, they nolonger have the information advan-tage or time-and-place advantagethat they once had over other marketparticipants. One of the major

changes instituted by the NYSE wasthe elimination of market makers’“look”at incoming orders before theywere displayed to the market. Inexchange for giving up that advan-tage, DMMs instead now trade on“parity”with other exchange mem-bers, meaning they no longer have to yield to other liquidity providerson incoming orders.

“They’re eligible to participate inthe trades when they are at the insideprice [i.e., the NBBO],”explains JosephMecane, the NYSE’s EVP and chiefadministrative officer of U.S. markets,who notes that the DMMs earn thehighest rebate from the exchange forproviding liquidity. DMMs earn 30cents per 100 shares, whereas supple-mental liquidity providers, or SLPs —a new class of market marker that theNYSE established to provide addition-

al liquidity and compete for marketshare — earn 17 cents per 100 shares,provided the SLPs meet certain quot-ing, price and volume requirements.

To become an NYSE DMM, GETCOpurchased part of the former NYSEspecialist LaBranche’s book of busi-ness from Barclays Capital. Barclayshad acquired the LaBranche specialistbusiness, which included 700 stocknames, in January for $25 million butwas asked to divest about half thebook to diversify the allocationsacross the DMMs. Barclays wasalready responsible for 900 listedNYSE securities following the firm’sMarch 2009 acquisition of the DMMrights of Bear Wagner Specialists fromJ.P. Morgan Chase.

Sources suggest that the NYSEwanted to bring in a strong player toboost the liquidity of the DMMs, and

NYSE Makeover Attracted GETCO

“This DMM opportunity

is another extension of our

core business. ...The vast

majority of our orders are

passive liquidity.”

—Dave Babulak, Managing Director, GETCO

T

0610_20-25.qxd 4/29/10 4:26 PM Page 22

ADVANCED TRADING • www.advancedtrading.com • June 2010 23

new DMM designation. Meanwhile, a year earlier, theexchange had created the SLP role.

At the same time, the NYSE revamped its technolo-gy and rule set to be more friendly to high-frequencytrading firms. Sources credit the new market model,including the start of the SLP program and the introduc-tion of the DMMs, with helping the NYSE stabilize itsmarket share in the wake of the fragmentation of listedvolume across multiple trading venues that stemmedfrom the introduction of Reg NMS. GETCO currently isone of only five firms — along with Goldman Sachs,Kellogg Group, Bank of America Merrill Lynch andBarclays Capital — serving as NYSE DMMs on the floor.

A Skeptical Buy-Side ResponseBut buy-side firms still are not comfortable with high-frequency trading firms interacting with their customerorder flow. “It’s a mixed blessing,” comments JenniferSetzenfand, VP and senior trader at FederatedInvestors in Pittsburgh. “I don’t like it, but I do like thefact that they are opening them up to regulatory scruti-ny,” she adds, suggesting that the DMM role will subjectGETCO to more oversight by the NYSE and the SEC.

“You’ve got to keep in mind that not all high-fre-quency [trading] is bad,” Setzenfand acknowledges.When HFT shops supply “the volume you need at thetime you need it and the price that’s desired, that canbe acceptable. But if your information is taken away

from you and used against you,” that is the problem,says the buy-side trader.

As soon as the news that GETCO would take on theDMM role at the NYSE broke, buy-side firms voicedconcerns to their sell-side brokers. “We had some verylarge clients express skepticism about if this was goodfor U.S. markets,” relates Timothy Reilly, managingdirector and head of electronic execution sales forthe Americas at Citi.

“For the past year, the majority of the institutionaltrading community has consistently asked us to avoidGETCO,” notes a sell-side trading executive whorequested anonymity. “However, going forward, whencertain stocks are routed to the NYSE, they will bepotentially trading against GETCO’s designated marketmaking unit. That said, we work in a highly regulatedmarketplace, and participants are mandated to routeaccording to [Reg] NMS and best execution require-ments regardless of their initial skepticism.”

Some concerned buy-side firms have even instruct-ed their sell-side algorithm providers to avoid GETCO’sdark liquidity pool, known as GETCO ExecutionServices, according to the sell-side trading executive.GETCO’s Babulak explains that although GETCO onlymarkets the dark pool to sell-side firms, buy-side firmscan receive executions from GETCO’s ATS throughtheir sell-side algo providers.

But institutions no longer can avoid interacting

word on the Street is that followingthe NYSE’s makeover, GETCO wasinterested. GETCO already was an SLP,— along with Goldman, BarclaysCapital, Knight, Citadel and recententrant Virtu Financial, another high-frequency proprietary trading firm.(According to the NYSE, in MarchDMMs’participation was 8.5 percentof NYSE-listed volume; SLPs matched11.4 percent of NYSE-listed volume.)

Passing the Torch“It is a different business model than ithistorically was,”observes JosephCangemi, managing director and headof equity sales and trading forConvergEx Group’s global electronictrading unit.“What you’re seeing is apassing of the torch from a [specialistsuch as LaBranche] that was more suit-ed to the other market structure, tothe firm that is more suited to an elec-tronic, fragmented, high-speed marketstructure. [GETCO] has technologies

and speed that match the present daymarket structure.”

Now that NYSE trading is 90 percent electronic via automatedalgorithms, GETCO can run its sophis-ticated models and automated market making, suggests theexchange’s Mecane.Technologychanges at the NYSE reduced latencyon the exchange from 105 millisec-onds just a few years ago to five milliseconds in July 2009. And thenext platform iteration “will bring usbelow a millisecond,”Mecane says.

The timing was right for GETCO,acknowledges Dave Babulak, a managing director at the firm.“NYSEmade a lot of investments in tech-nology and a lot of modernization oftheir rule set, and this really enabledus to take what we’ve been doing inthe electronic world and make thisuseful on the floor,”he relates.

“This is good for the NYSE, and it willexperience a market share boost in the

names in which GETCO is the DMM,”comments Joe Gawronski, presidentand COO of Rosenblatt Securities.“Ifthe NYSE is paying a higher rebate toGETCO [as a DMM rather than an SLP],it means GETCO will be able to makebetter prices for investors.”

According to Rosenblatt Securities,NYSE Euronext’s share of NYSE-listedtrading volume (including both NYSEClassic and NYSE Arca) was 33 per-cent in March of this year, while otherpublished reports say it had slippedto 28 percent at the end of 2009, sug-gesting that the combination offaster technology and economicincentives for automated marketmakers is working. But the NYSE’sMecane isn’t ready to declare themove a major success just yet.

“I’m not going to sit here and pre-dict a dramatic improvement,”he con-cedes.“It certainly won’t hurt marketshare. I think it will be a positive — cer-tainly a step in the right direction.”–I.S.

0610_20-25.qxd 4/29/10 4:26 PM Page 23

24 June 2010 • www.advancedtrading.com • ADVANCED TRADING

with GETCO now that it is a DMM. Under the NYSE’srevised rules, as long as the DMM is quoting at theinside price — the National Best Bid and Offer(NBBO) — it trades on parity with the other exchangemembers, meaning it can jump to the front of the linefor a piece of the order.

“Parity means it’s not pure price-time priority. If theDMM is at the NBBO and an order comes in, the DMMmay get a piece of that order,” explains Babulak. “It’san incentive to post quotes at the NBBO.”

Bilateral Support?Given that GETCO already was a major liquidityprovider on the NYSE, sell-side firms view the changeas a natural evolution of GETCO’s role. “This is justanother step in the full integration of electronic tradingand high-frequency market making into the exchangeworld,” observes Joe Gawronski, president and COO ofRosenblatt Securities, an institutional agency brokerthat specializes in market structure analysis.

“Obviously they’re already involved,” saysGawronski, who notes that high-frequency tradingalready accounts for one-half to two-thirds of U.S.equity trading volume. “But to make one of the lead-ing [high-frequency trading] firms a DMM — it’s sortof like taking HFT out of the shadows and bringing itinto the light under the mantle of the NYSE,” he adds,noting that the move may make HFT more legitimatein certain critics’ eyes.

Nonetheless, buy-side firms want to know how sep-arate the DMM role is from the proprietary trading busi-ness of the overall firm, which is permitted to pursueother trading strategies. “Clients want to understandthe precise relationship between GETCO’s primary mar-ket making businesses and their NYSE DMM unit,” saysthe anonymous sell-side trading executive.

Others question whether HFT shops provide liquidity to small- and mid-cap stocks or only to thetop 100 large caps.

That view is “misinformed,” GETCO’s Babulakinsists, pointing out that the firm is active in 2,500stocks every day. “We have a pretty deep market pen-etration.” According to Babulak, GETCO is obligatedto quote in a number of stocks that have an averagedaily volume of less than 50,000 shares.

Indeed, some buy-side traders are less skeptical.Gus Sauter, chief investment officer at Vanguard,which manages about $1.4 trillion in mutual fundassets, says he doesn’t think high-frequency tradersdeserve the black eye they’ve been given. “I don’t seethis as a negative development. This is sort of a natu-ral evolution,” he comments. “GETCO has been serv-ing as a supplemental liquidity provider on theexchange, so to move to a DMM is an incremental stepand one that we hope will be sufficiently monitored.”

Sauter emphasizes that Vanguard performs its ownmonitoring as well, regardless of the firm with whichit is trading. “You always have to monitor the tradingthat you do, and make sure you’re getting best execu-tion and make sure you’re not being gamed,” he says.

In Sauter’s view, it really comes down to trusting theNYSE to police the new breed of electronic marketmakers. “It’s got nothing to do with GETCO. If theNYSE had any problems with this model, the exchangewould have a lot to lose,” he says.

“We are already highly regulated,” GETCO’s Babulakresponds. “As a registered broker-dealer, we’re regulat-ed by the SEC and CFTC. Regulated markets areimportant. We’re out there — posting orders for oth-er people to trade with. As a market maker, we needwell-regulated markets.”

Obligations and Privileges Amid Concerns Rosenblatt’s Gawronski notes that because GETCOhas obligations as a DMM that it didn’t have in its SLProle, there could be benefits to the broader market ofhaving the firm serve as a DMM. “There are obligationsand privileges that come with the DMM role,”Gawronski says. “They certainly have more obliga-tions than an SLP. You have to deal with the corporateissuer’s management, there are certain responsibili-ties at the open and the close, and requirements of howoften you have to quote at the NBBO.”

Of course, serving as a DMM can significantly add toGETCO’s profitability as well. The DMMs receive ahigher rebate for supplying liquidity than any otherclass of exchange member — 30 cents per 100 sharesversus 17 cents for SLPs.

“I’ve been pounding the table that high-frequencytraders need to legitimize themselves,” FederatedInvestors’ Setzenfand says, noting that one of the crit-icisms against high-frequency traders is that they don’thave obligations as a market maker. “If you want themto be counted, registered, identified, this is kind of astep in the right direction. Yes, they get benefits, [but]

cover story

“To make one of the leading[high-frequency trading] firms a

DMM— it’s sort of like taking HFT

out of the shadows and bringing it into the light.”

—Joe Gawronski, President and COO,Rosenblatt Securities

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they actually have obligations they didn’t have before.”Still, there is a certain shroud over electronic mar-

ket makers and how their obligations will work withhigh-frequency trading to drive profits that seems toinstill fear in the buy side. “As a market maker, wepost two-sided markets,” explains GETCO’s Babulak.“Other people buy and we sell it to them, and if we doour job correctly, we manage to hang on to a littlepiece of the bid-asked spread.”

Despite a lack of tangible evidence that high-fre-quency trading damages the equity markets, allega-tions that certain strategies front-run orders ormanipulate prices persist. “Today we operate in amarketplace where many people hold conspiracy the-ories,” says Citi’s Reilly.

Nonetheless, “Customers have appropriate con-cerns about predatory order flow and informationleakage,” he acknowledges. “So it’s not shocking thatGETCO’s arrival on the NYSE floor is making sometraders a little uncomfortable.”

GETCO’s Babulak suggests there are many misun-derstandings surrounding high-frequency trading.“High-frequency trading is not an industry, it’s not astrategy — it’s a technique,” he asserts. “Our view is thatwe use HFT as a technique to help us make markets. It’sjust the natural evolution of how people have alwaysmade markets. It’s applying technology to it.”

Not everyone is completely convinced. “There’s awhole lot that we don’t understand about how the elec-tronic market works,” says Federated Investors’Setzenfand. “On the front end they have to meet regu-latory scrutiny. But I just don’t think that anyone under-stands what happens to our information post-trade.”

Something Old, Something NewDespite the concern and controversy, the buy sidecan’t avoid interacting with high-frequency order flow.Reg NMS actually compels the buy side to interactwith the NYSE quote, Citi’s Reilly points out.“Historically there’s never been a regulatory obligationto interact directly with these types of prop-drivenplatforms,” he relates.

The NYSE’s Mecane admits that the exchange hadto address questions from the buy side when the GET-CO news broke. “There’s been a lot questions, a lot ofcuriosity,” he says. “People want to see what effect ithas on the marketplace. The general way we’ve com-municated it is, we expect this will draw more liquid-ity to the platform. I think if that’s the case, institutionswill be pleased with it.”

But even if it were not for Reg NMS and GETCO’snew status as an NYSE DMM, electronic market mak-ing simply has become too pervasive for the buy sideto avoid HFT order flow, GETCO’s Babulak and oth-er sell-side sources point out. “We make markets onNasdaq, BATS and Arca. We’ve been an SLP on

NYSE,” Babulak says. “When you look at a publicquote, there’s a pretty good chance you’re seeing GET-CO prices there.”

Adds Jeffrey Wecker, CEO of Lime Brokerage, anagency broker that provides connectivity and low-latency infrastructure to high-frequency shops, “I findit a little bit amusing that there are buy-side firms thatdon’t want to trade with [an electronic market makingfirm] because just about every buy-side firm [already]is trading with high-frequency firms at some point.”

According to Vanguard’s Sauter, a number of DMMsalready pursue trading activity that could be consideredhigh-frequency trading. Pointing to the electronic mar-ket making activities of Barclays and Goldman,Rosenblatt’s Gawronski notes that several of theNYSE’s DMMs have been trying to make the transitionfrom the old specialist world to the new model.

Further, some experts suggest that including high-frequency trading shops such as GETCO — with theirsophisticated computer programs and expertise intrading derivatives — will bring a new skill set to riskmanagement. “I do believe they control risks — that’swhat high-frequency-trading firms do,” comments

Vanguard’s Sauter. “They’re really playing into dis-crepancies in the market and closing those discrepan-cies. They do that because of the technology, and theby-product is that they’re bringing tremendous liquid-ity to the marketplace.”

Ultimately, most buy-side traders acknowledge thatelectronic market makers are the way of the future. “Ifthey’re making a market for me, and it’s a tight bid-offer spread, the fact that they’re using computer tech-nology doesn’t scare me,” says Sauter. “People want topaint [high-frequency traders] as bad guys. They’rethe current day market makers. The world is electron-ic — why shouldn’t the market makers be electronic?If you don’t evolve, you become a dinosaur.” ■

“Customers have appropriate concerns about predatory order flow and information leakage.”—Timothy Reilly, ManagingDirector and Head ofElectronic Execution Salesfor the Americas, Citi

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26 June 2010 • www.advancedtrading.com • ADVANCED TRADING

Directory of Transaction Cost Analysis ProvidersJune 2010

Abel Noser/Ancerno/Trade-Zoom . . . . . . . . . . . . . . . 26

Bank of America Merrill Lynch/Bank of America Merrill Lynch TCA . . . . . . . . . . . . . 27

Barclays Capital/Portfolio WebBench and TradeGauge . . . . . . . . . . . 27

Bloomberg/BTCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Centre for Business Mathematics andInformatics/Ultimate Alpha . . . . . . . . . . . . . . . . . . . . 28

ConvergEx Group/PerformEx, Algo Messenger . . . 28

Credit Suisse/ExPRT – Execution PerformanceReporting Technology . . . . . . . . . . . . . . . . . . . . . . . . . 28

Deutsche Bank/Execution Consulting Services . . . 29

Elkins/McSherry/Elkins/McSherry . . . . . . . . . . . . . . . 29

FlexTrade Systems/FlexTQM . . . . . . . . . . . . . . . . . . . . 30

Global Trading Analytics/GTA . . . . . . . . . . . . . . . . . . . 30

Goldman Sachs Execution & Clearing/Goldman Sachs Execution Quality Analysis . . . . . 30

GSCS Information Services/itero . . . . . . . . . . . . . . . . 31

Instinet/Instinet Insight . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Investment Technology Group (ITG)/ITG TCA . . . 32

Knight/Knight TCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Pragma Securities/Transaction Process Analysis . . . . . . . . . . . . . . . . . . . 33

Quantitative Services Group/SYNC . . . . . . . . . . . . . 33

Rosenblatt Securities/Rosenblatt IntegratedTransaction Analytics (RITA) . . . . . . . . . . . . . . . . . . . . 34

TAG/TAG Equities TCA, TAG Options TCA . . . . . . . . . . 34

Tethys Technology/TotalTCA . . . . . . . . . . . . . . . . . . . . 35

Thomson Reuters/Thomson Reuters Global TCA . . . . . . . . . . . . . . . . . . 35

*This is not a comprehensive list of transaction cost analysis providers. Advanced Trading invited other providers to participate in the directory, but they could not submit their information by press time. Providers entered their own information, which has been edited for space. For more information on these providers, as well as additionaldirectories of trading technology firms, see our online directories at www.advancedtrading.com/directories.

Abel Noser/Ancerno Ltd.Description of ServiceAbel Noser TCA services is a leading global solution focusing on the needs of the institutional money management, brokerage,plan sponsor and investment consultant communities since 1985.Ancerno, Ltd. is a leading wholesale provider of TCA services.Ancerno works with custodian banks, brokers, OMS/EMS providersand others to deliver a full range of pre-trade, real-time and post-trade products and services. Ancerno was spun off from Abel Noserin 2007 to create a wholesale broker-neutral TCA provider.

From where does the service get transaction data?Trades data is received directly from client OMSs.Trades data is thenmarried with market data from leading data vendors and in somecases directly from exchanges.

How frequently is data collected?Data is collected as frequently as next day with real-time data collection expected in Q4 2010.

How is the data analyzed?Trades data is compared to market data segments around the globe.Datais analyzed for consistent historical patterns and outlier trades, whichenables our trade consultants to make actionable recommendations.

What criteria are used to measure broker execution?Brokers are measured vs. both strike price and volume test metrics.Moreover, brokers are designated unique stock-level weightings tocapture trade difficulty.

Are pre-trade estimates and intra-trade analysis available?Yes. Pre-trade estimates are available and users may change thedefault to anticipate future market conditions.

Is data real-time for pre-trade estimates and intra-trade analysis?Real-time web-based pre-trade estimates are expected in Q4 2010.Currently this offering derives pre-trade estimates from data analyzed up until one day prior to trade date.

Is data for post-trade analysis real-time, end-of-day or following day?Real-time post-trade is expected in Q4 2010. Currently post-tradeanalysis is offered as frequently as the following day.

Contact InformationPeter Weiler Allison Keane646-432-4000 646-884-6456pweiler@abelnoser.com akeane@ancerno.comwww.abelnoser.com www.ancerno.com

Trade-Zoom

powered by

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Bank of America Merrill LynchDescription of ServiceBank of America Merrill Lynch provides comprehensive TCA for its global execution clients. Additionally, we offer market impactanalysis along with the ability to monitor trade performance acrossvarious classifications, such as exchanges, market cap, etc., allowingclients to receive in-depth cost analysis beyond the traditional TCA benchmarking. In addition, our quantitative consulting teamprovides analysis based on individual requirements.

From where does the service get transaction data?Our global OMS captures transactional data directly from clients’OMS/EMS systems. Our flow data is stored in our internal database,which is struck against relevant market data information.

How frequently is data collected?Data is collected in real time on every trading day.

How is the data analyzed?Data is analyzed in a variety of ways to a variety of benchmarks. Forexample, we analyze individual trades based on market cap, spreads,% ADV, etc.These parameters are all customizable to individual needs.

What criteria are used to measure broker execution?By using the full suite of standard benchmarks as well as proprietarymeasures, execution performance is validated on all electronic products/enhancements offered by Bank of America Merrill Lynch.

Are pre-trade estimates and intra-trade analysis available?We provide proprietary impact cost estimates for all trades and monitor trading in real time for performance and/or behavioralanomalies.

Is data real-time for pre-trade estimates and intra-trade analysis?All data is captured in real time.

Is data for post-trade analysis real-time, end-of-day or following day?NA

Contact InformationBank of America Merrill Lynch212-449-6090www.baml.com

Bank of America Merrill Lynch TCA

Barclays CapitalDescription of ServicePre-Trade Analysis: Liquidity screening, market impact cost fore-casting, optimal trade scheduling, risk and volatility analysis, recentperformance, and streamlined risk bids. Execution: Real-time monitoring of progress and slippage relative to 17 benchmarks.Post-Trade Analysis: Slippage details, transaction summary reports,and bespoke execution and horizon analysis.

From where does the service get transaction data?The source for the order flow data is either order data stored inBarclays Capital’s internal flow databases or uploaded to the application for multi-broker comparative analysis.

How frequently is data collected?Data is collected on an intraday basis and can be analyzed in realtime or over a longer horizon (e.g., weekly, quarterly, annually).

How is the data analyzed?Data is analyzed with respect to multiple benchmarks aggregatedover several user-defined aggregation categories (e.g., liquidity consumption or market capitalization).

What criteria are used to measure broker execution?General categories include slippage analysis with respect to variousprice or volume benchmarks, child order execution quality, and execution venue breakdown reports. Performance is also assessed in the context of the flows’ alpha characteristics and supplementalstatistics such as trade duration and strategy parameters.

Are pre-trade estimates and intra-trade analysis available?Yes. Both pre-trade estimates and intra-trade analysis are available.

Is data real-time for pre-trade estimates and intra-trade analysis?Slippage results are available on an intraday basis.

Is data for post-trade analysis real-time, end-of-day or following day?T+0 reports are based on pro-forma intraday data.T+1 reports arebased on official exchange data.

Contact InformationBrian Pomraning212-528-6356brian.pomraning@barclayscapital.comhttps://live.barcap.com

Portfolio WebBench and TradeGauge

BloombergDescription of ServiceBloomberg’s BTCA product is a pre- and post-trade TCA tool for equi-ties. It is fully integrated into the core Bloomberg offering to harnessthe breadth of trade and pricing data and to allow access to our ana-lytic tools. It is highly customizable and empowers the user to getthe outputs they need as often as they are needed.

From where does the service get transaction data?BTCA can receive data feeds from Bloomberg’s AIM OMS, EMSX, andany other OMS/EMS or proprietary system.

How frequently is data collected?Daily or periodic, depending on client needs.

How is the data analyzed?Data can be visualized graphically or displayed in interactive tables. Bothparent orders and routes can be compiled into more than 30 groupingcategories, allowing comprehensive drill-down and drill-through.

What criteria are used to measure broker execution?In addition to numerous benchmarks to measure broker liquidity —

standard and customizable — we offer both proprietary and third-party cost models to handicap performance.

Are pre-trade estimates and intra-trade analysis available?Yes.Is data real-time for pre-trade estimates and intra-trade analysis?Yes.

Is data for post-trade analysis real-time, end-of-day or following day?Real-time pre-trade analytics are supported in EMSX. BTCA providesreports on a td+1 basis.

Contact InformationLinda Giordano212-617-1711lgiordano8@bloomberg.netBloomberg.com

BTCA

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Credit SuisseDescription of ServiceCredit Suisse offers global transaction cost products across algorithmic trading (AES), program trading, cash (block) trading,high-frequency/low-latency, AES FX, AES futures and AES options.

From where does the service get transaction data?Credit Suisse’s ExPRT gets transaction data from its global databasesacross multiple asset classes.

How frequently is data collected?Data is collected in real time.

How is the data analyzed?The trade data is analyzed in real time in synch with market data.We enrich the analysis with value-added analytics to provide business intelligence.

What criteria are used to measure broker execution?Execution performance is measured via Credit Suisse’s ExPRT TCA methodology.

Are pre-trade estimates and intra-trade analysis available?Pre-trade estimates are available via Credit Suisse’s Edge suite ofportfolio analytics. Intra-trade analytics are available real time at theorder and venue level on-demand.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes.

Is data for post-trade analysis real-time, end of day or following day?TCA is available during the trading day and the following day.

Contact InformationGaurav Mundra212-325-4096gaurav.mundra@credit-suisse.com

ExPRT – Execution Performance Reporting Technology

Centre for Business Mathematics and Informatics

Description of ServicePost-trade TCA analysis for asset managers and brokers trading onthe Johannesburg Securities Exchange.

From where does the service get transaction data?From the data provider BFA McGregor.

How frequently is data collected?Daily since April 2003.

How is the data analyzed?SQL-based proprietary software programs.

What criteria are used to measure broker execution?Implementation shortfall, period VWAP, percentage count score,percentage volume score, participation weighted price.

Are pre-trade estimates and intra-trade analysis available?No.

Is data real-time for pre-trade estimates and intra-trade analysis?No.

Is data for post-trade analysis real-time, end-of-day or following day?Following day.

Contact InformationProf. Dawie de Jongh27-82-336-4938dawie.dejongh@nwu.ac.zawww.nwu.ac.za/BMI

Ultimate Alpha

ConvergEx GroupDescription of ServiceConvergEx provides TCA through PerformEx.This web-based application provides an in-depth analysis of all algorithmic tradingorders.Through this tool, clients have access to comprehensive pre-trade analysis. PerformEx also provides real-time intra-trade performance monitoring. Post-trade analyses also are available.(For full description, see online listing.)

From where does the service get transaction data?Directly from our algorithmic trading platform.

How frequently is data collected?Data is collected in real time.

How is the data analyzed?Data is analyzed in real time using our kdb tick database.We capture100% of ticks for all relevant markets. Our analytics are written in q.

What criteria are used to measure broker execution?This criteria is customer-driven.We offer all standard benchmarks as

well as full customization.

Are pre-trade estimates and intra-trade analysis available?Yes.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes.

Is data for post-trade analysis real-time, end-of-day or following day?Data for post-trade analysis is available end-of-day.

Contact InformationKelly Donnelly617-748-6773kdonnelly@convergex.comwww.convergex.com

PerformEx,Algo Messenger

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Deutsche BankDescription of ServiceMultiple service offering includes daily, monthly and quarterlyreports on a global basis, as well as high-touch bespoke consultativereports that analyze tick-level data and highlight trends in tradingactivity.

From where does the service get transaction data?Executed trades are captured on a child level from our OMSs globally. Market data sources include, but are not limited to, the consolidated tape, Barra, Bloomberg and Reuters.

How frequently is data collected?Real time on every trading day.

How is the data analyzed?An algorithm is used to match execution data to time of sales andprevailing market data at time of execution. A low-latency, high-performance visual analytics platform is deployed to analyze theconsolidated database.

What criteria are used to measure broker execution?Neutral and consistent benchmarks and tick metrics

Are pre-trade estimates and intra-trade analysis available?Pre-trade estimates are currently available. Intra-trade estimates areexpected to be available in 2010.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes.

Is data for post-trade analysis real-time, end-of-day or following day?End of day.

Contact InformationThomas Chippas212-250-3988thomas.chippas@db.comhttp://autobahn.db.com

Execution Consulting Services

Elkins/McSherry,LLCDescription of ServiceElkins/McSherry’s trading data provides institutional investors withan objective look at how institutional equity and fixed income tradecosts compare to the marketplace and Elkins/McSherry’s universes ofglobal trade data. Customers use our service to evaluate all aspectsof the trade process.

From where does the service get transaction data?Elkins/McSherry maintains a database for all market trades receivedfor U.S. and international equity trading and U.S. and internationalfixed-income trading. Elkins/McSherry’s global transaction data isprovided by market data vendors.The Elkins/McSherry GlobalUniverse data is a collection of actual transaction data fromElkins/McSherry’s clients.

How frequently is data collected?Elkins/McSherry downloads transaction data every night and uses itto calculate market impact benchmarks for comparative purposes.Client data is collected in real time,T+1, weekly, monthly, quarterly,semi-annually or annually.

How is the data analyzed?The trade cost analyses measure commissions, fees and marketimpact against a universe, or grouping, of peers. Equity marketimpact is scored against the most appropriate trading cost bench-

mark and the Elkins/McSherry market impact universe.

What criteria are used to measure broker execution?Elkins/McSherry can use multiple benchmarks to measure brokerexecution. Broker executions are compared to, but not limited to, aninterval VWAP and arrival price benchmark. Elkins/McSherry also hasspecific universes by trade size, market capitalization, market sectorand country to compare performance of broker executions.

Are pre-trade estimates and intra-trade analysis available?Yes.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes — available for intra-trade analysis.

Is data for post-trade analysis real-time, end-of-day or following day?Post-trade report viewing is on a real-time and end-of-day basis.

Contact InformationJames Bryson917-790-4606jbryson@elkinsmcsherry.comwww.elkinsmcsherry.com

Elkins/McSherry

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Goldman Sachs Execution & Clearing,L.P.

Description of ServiceGoldman Sachs’ suite of pre-, intra- and post-trade analytics, as wellas a team of execution consultants, help clients trade more efficient-ly, improve performance and reduce transaction costs.

From where does the service get transaction data?Client transaction data comes directly from internal OMSs. Global,real-time feeds and access to premium subscription services providecomprehensive market data sources.

How frequently is data collected?Data is collected on a daily basis and in real time.

How is the data analyzed?Data is analyzed using Goldman Sachs’ proprietary models.

What criteria are used to measure broker execution?Multiple industry standards and proprietary measures of execution

quality — with an emphasis on client-specific short-term alpha cap-ture — are used to evaluate broker execution.

Are pre-trade estimates and intra-trade analysis available?Yes. Pre-trade and intra-trade analysis is available.

Is data real-time for pre-trade estimates and intra-trade analysis?We provide both historical and real-time pre-trade estimates.

Is data for post-trade analysis real-time, end-of-day or following day?Post-trade analysis data is end-of-day. It is also available in real timethrough the REDIPlus Portfolio Trading platform.

Contact Informationgset-news@gs.comhttp://gset.gs.com

Goldman Sachs Execution Quality Analysis

FlexTrade Systems,Inc.Description of ServiceA comprehensive transaction quality management system that inte-grates pre-trade analysis and cost estimation with real-time and his-torical TCA to optimize trading costs across multiple destinations,time horizons and strategies.

From where does the service get transaction data?Transaction data comes in from FlexTRADER and client OMSs. All mar-ket data is available from feeds, such as Reuters and Bloomberg, etc.

How frequently is data collected?FlexTQM hosts real-time data updated every second with no restric-tions.The user can view both historical and updated data.

How is the data analyzed?All of FlexTQM’s graphs and reports support drill-down functionality,getting as granular as you choose.With an intuitive GUI, it is easy toquickly identify costly areas. FlexTQM boasts both pre- and post-trade analysis.

What criteria are used to measure broker execution?FlexTQM can view execution by the total cost incurred by each broker strategy, whereby you can see which strategy is best and per-form a cost comparison.

Are pre-trade estimates and intra-trade analysis available?Yes.

Is data real-time for pre-trade estimates and intra-trade analysis?Pre-trade estimates are not real-time. Intra-day analysis is real-time.

Is data for post-trade analysis real-time, end-of-day or following day?Real-time.

Contact InformationSales516-627-8993, Ext. 2sales@flextrade.comwww.flextrade.com

FlexTQM

Global Trading Analytics,LLCDescription of ServiceGlobal Trading Analytics (GTA) is a web-based trading cost analysisconsulting firm providing custom, customer-specific TCA in severalglobal markets, including equities, FX and fixed income. GTA hasdeveloped proprietary methodologies that measure trading costswithin the correct context, providing clients with accurate, transpar-ent results. In addition, the web-based reporting structure allows cus-tomers to access their results with complete drill-down functionality.

From where does the service get transaction data?GTA collects data from around the globe on a daily basis.

How frequently is data collected?Daily.

How is the data analyzed?Based upon a client-specific, customized platform.

What criteria are used to measure broker execution?Multiple criteria and any required custom criteria.

Are pre-trade estimates and intra-trade analysis available?Pre-trade.

Is data real-time for pre-trade estimates and intra-trade analysis?Historical.

Is data for post-trade analysis real-time, end-of-day or following day?GTA delivers post-trade reporting daily, weekly, monthly, quarterlyand annually.

Contact InformationDavid Hintz201-309-3060dhintz@gtanalytics.comwww.gtanalytics.com

GTA

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GSCS Information Services Ltd.Description of Serviceitero provides buy-side clients with data analysis and consultingservices designed to help them improve the quality of executions inglobal equity, bond and FX markets.

From where does the service get transaction data?In most cases, data is provided by buy-side clients directly.

How frequently is data collected?As frequently as daily where volumes and analysis deadlines requireit. Most clients submit data weekly; a few still operate to a monthlyschedule.

How is the data analyzed?Data is analyzed against 20 benchmarks, including measures of mar-ket impact, cost of delay, participation and opportunity cost. Analysisalso includes proprietary “degree of difficulty”measures, and resultscan be assessed using combinations of up to 15 filters, including cus-tom parameters set by clients.

What criteria are used to measure broker execution?Combinations of up to 20 different benchmarks are available; clientshave the option to use different benchmarks depending on theirtrading strategies.

Are pre-trade estimates and intra-trade analysis available?itero does not develop its own pre-trade estimates, but performancecan be measured against broker pre-trade estimates. At presentGSCS Information Services does not offer in-trade analysis but willoffer this service later in 2010.

Is data real-time for pre-trade estimates and intra-trade analysis?In the future.

Is data for post-trade analysis real-time, end-of-day or following day?Typically following day at present.

Contact InformationDana Caggiano44-1932-568488dcaggiano@gscs.infowww.gscs.info

itero

InstinetDescription of ServiceInsight is a global suite of broker-neutral analytics — pre-trade, real-time and post-trade — that can be used together or separately todefine optimal trading strategies, monitor trading progress in realtime, and analyze executions to improve future performance.

From where does the service get transaction data?Transactions routed through Instinet’s Newport 3 EMS are directlyaccessed by Insight.Trades executed outside of Instinet can beuploaded to Insight, and automated processes can also be set up toseamlessly integrate Insight into a client’s daily workflow.

How frequently is data collected?Data is collected in real time.

How is the data analyzed?Each module of Insight allows clients to group and aggregate tradedata across market cap, liquidity, sector, region and other key cate-gories. Advanced visualization tools allow for easy analysis of tradingperformance from a variety of perspectives, enabling traders toquickly act and react.

What criteria are used to measure broker execution?Brokers are measured versus arrival price, volume-based benchmarksand spread capture.

Are pre-trade estimates and intra-trade analysis available?Yes.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes.

Is data for post-trade analysis real-time, end-of-day or following day?Reports can be generated same day, historically and intra-day.

Contact InformationInstinet U.S. Sales877-INSTINETnewaccountsales@instinet.comwww.instinet.com

Instinet Insight

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32 June 2010 • www.advancedtrading.com • ADVANCED TRADING

Investment Technology Group,Inc.(ITG)Description of ServiceITG TCA helps optimize fund performance throughout the invest-ment life cycle, from investment planning to evaluation of brokerage,trading, opportunity, total transaction costs and peer performance.ITG TCA helps customize investment process analysis, monitor andenhance trading performance, and meet best execution market stan-dards through analysis of broker selection and review processes.

From where does the service get transaction data?The ITG Extract Manager (EM) software enables automatic daily orperiodic extraction of data from the most common OMSs, includingMacGregor XIP, Charles River, Eze Castle, Moxy and Linedata.Externally sourced files are also supported.

How frequently is data collected?ITG TCA collects data daily, weekly or quarterly, as dictated by the client.

How is the data analyzed?Data is analyzed against as many as 10 custom benchmark definitions. Data validation and pre-processing can also be facilitated. Performance results are delivered on a T+1 basis via summary and trade-level reports and dashboards.

What criteria are used to measure broker execution?Reporting analytics take into account various broker details,including reason, venue, instruction and commissions. Client-

provided mapping files can enable viewing overall broker relation-ships as well as individual sub-units within one parent firm.

Are pre-trade estimates and intra-trade analysis available?Pre-trade estimates are provided on a post-trade basis throughAgency Cost Estimator (ACE), ITG’s proprietary cost model.The post-trade version of ACE provides cost estimates using actual day-of market action. Real-time and intraday pre-trade solutions areprovided through ITG Logic.

Is data real-time for pre-trade estimates and intra-trade analysis?ITG Logic delivers information in real time.

Is data for post-trade analysis real-time, end-of-day or following day?Post-trade analysis utilizes market data captured in real time fromthe exchanges and on an end-of-day basis from market data vendors. Benchmark definitions such as the Participation WeightedPrice model can support multi-day orders and will be updated asnew trade days are added to the order’s lifespan.

Contact Information212-444-6300info@itg.comwww.itg.com

ITG TCA

KnightDescription of ServiceKnight TCA provides users with a suite of pre-trade, real-time andpost-trade tools for analysis of global single or aggregate trade activity normalized to a number of currencies at the user’s discretion.These tools not only identify risk and quantify performance, but alsoshow deviations in market conditions.

From where does the service get transaction data?Transaction data is sourced from trade activity leveraging Knight’ssales trading services, order flow through Knight’s DMA tool (KnightDirect EMS), access to Knight’s algorithmic suite via third partyOMS/EMS systems, and anonymous upload from Excel spreadsheetsor standard files formats.

How frequently is data collected?Data is collected from Knight’s various sources in real time. Clientsmay access this data 24x7 from a web-based dashboard, throughKnight Direct EMS, and via scheduled e-mail report on a daily,monthly or quarterly basis.

How is the data analyzed?Data is analyzed using combinations of several techniques depen-dant on the customizable goal of the end user. Such methodsinclude comparison of individual or aggregated trade activity to historical data, mathematical models and real-time market data.

What criteria are used to measure broker execution?Broker performance, as well as numerous other order stratifications,can be measured against a configurable list of benchmarks.

Are pre-trade estimates and intra-trade analysis available?Pre-trade estimates are available against single stocks and stock listsmeasured by multiple methodologies configurable to client objec-tives and time frames.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes. Real-time pre-trade and intra-trade analysis is coupled withKnight’s trading platforms to facilitate a mechanism to actively monitor slippage and allow modification of strategies ahead of ordercompletion.

Is data for post-trade analysis real-time, end-of-day or following day?Post-trade analysis can be viewed both in real time and through historical query and aggregation tools.

Contact InformationJoe Wald212-479-2335jwald@knight.comwww.knight.com

Knight TCA

directory of TCA providers

AT_0610-Directory-v3 4/29/10 1:15 PM Page 32

Pragma SecuritiesDescription of ServicePragma provides clients with a range of transaction analysis tools,including pre- and post-trade analysis, but also more sophisticatedand detailed transaction processing analysis (TPA).TPA enables buy-side clients to review the portfolio manager, the buy-side traderand the broker to determine where portfolio risk or transaction costscan be reduced.

From where does the service get transaction data?From equity market centers and clients.

How frequently is data collected?Daily.

How is the data analyzed?Data is analyzed by our research team using a variety of daily andintra-day reports.

What criteria are used to measure broker execution?It depends on what the buy-side trader wants to review with his

broker counterparts. We can analyze a wide range of behavior andinstructions.

Are pre-trade estimates and intra-trade analysis available?Yes.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes.

Is data for post-trade analysis real-time, end-of-day or following day?Real-time.

Contact InformationCurtis Pfeiffer212-542-5304cpfeiffer@pragmatrading.comwww.pragmatrading.com

Transaction Process Analysis

Quantitative Services GroupDescription of ServiceQSG educates and provides tools to traders and investment man-agers to assist them in measuring, managing and mitigating imple-mentation costs. An interactive, web-based decision-support toolhouses both pre-trade and post-trade analytics. Automated customreporting services and consulting constitute the rest of the service.

From where does the service get transaction data?QSG employs a proprietary matching algorithm that uses trade datareceived from client EMS and OMS systems and synchronizes it toReuters trade and quote data on a nightly basis in order to identifythe exact location of client executions.

How frequently is data collected?Data is collected throughout each trading day from globalexchanges. Clients can send us trading data at their convenience,but a daily file drop is most common.

How is the data analyzed?Each client execution is matched to the ticker tape, where the priceimpact of each execution is empirically measured. Analytics are thenbuilt on the aggregation of the individual liquidity concessions andtiming costs/savings incurred throughout the life of the order.Analytics are taken at the broker-placement level, the order level and the multi-day order level.

What criteria are used to measure broker execution?Brokers are categorized by the type of order flow directed to them,

and then measured using benchmarks and proprietary cost metricsspecifically tailored to each type of flow.The liquidity and timingcosts associated with broker execution are empirically separated,allowing for stronger comparisons of broker performance over time.

Are pre-trade estimates and intra-trade analysis available?Pre-trade variance and liquidity-based estimates and a post-tradeanalysis of intra-trade cost accrual are available.

Is data real-time for pre-trade estimates and intra-trade analysis?QSG is currently partnering with various EMS providers to bring real-time pre-trade and post-trade analytics directly to the desktopof traders.

Is data for post-trade analysis real-time, end-of-day or following day?QSG’s post-trade service is available on a T+1 basis and allows for rigorous analysis of a client’s trading activity.Through partnershipswith EMS systems, QSG is making available real-time and end-of-daypost-trade analysis.

Contact InformationJacqueline Jones630-637-8088 x219jjones@qsg.comwww.qsg.com

SYNC

ADVANCED TRADING • www.advancedtrading.com • June 2010 33

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34 June 2010 • www.advancedtrading.com • ADVANCED TRADING

TAGDescription of ServiceTAG’s online TCA product offers users the ability to examine post-traderesults of large orders for U.S. listed options and equities and Europeanequities. Examine results in summary, by industry indices, by portfolio,by symbol and more. Detailed tick-by-tick market data is available on-demand. Data is also available in .xml files for import to commonprograms or databases and in printed form in committee review.

From where does the service get transaction data?Order, trade execution and cost data are received directly fromclients or their OMSs. Market data for analyses is received directlyfrom industry exchanges and other trading centers.

How frequently is data collected?Data is collected in real time or daily.

How is the data analyzed?Trades are analyzed against full tick-by-tick quote and print data for periods as short as a fraction of a second to the full trading day.Numerous industry-standard and proprietary benchmarks are computed and stored for historical purposes and are available onlinewith full filtering capability.

What criteria are used to measure broker execution?Brokers are measured against industrywide data, peer group data,best bid and best offer data, and consolidated print data.

Are pre-trade estimates and intra-trade analysis available?Deep pre-trade metrics are available through TAG’s strategic partners.

Is data real-time for pre-trade estimates and intra-trade analysis?Intra-day analysis is available in real time for equities and options.

Is data for post-trade analysis real-time, end-of-day or following day?All are available.

Contact InformationDiane Sivertsen646-375-1558dsivertsen@tagaudit.comwww.tagaudit.com

TAG Equities TCA,TAG Options TCA

directory of TCA providers

RosenblattSecurities Inc.(RSI)

Description of ServiceAs a value-added adviser, we not only assess trading performance,but also help desks produce urgency estimates, classify orders properly and develop decision trees in order to more closely linktrading to the investment process and alpha capture.

From where does the service get transaction data?Real-time exchange data comes from Bloomberg or NYSETechnologies’ Market Data SuperFeed feed handler.

How frequently is data collected?The data is collected in real time and historically.

How is the data analyzed?Data is aggregated, calculated and reported via e-mail and intranetin a report generated with visualization software with drill-downdetail that can be customized depending upon the client’s requirements.

What criteria are used to measure broker execution?Execution performance is compared relative to proprietary pre-trade

market impact estimates and multiple benchmarks, such as arrivalprice, close, prior close,VWAP and interval VWAP, and peer efficiency.

Are pre-trade estimates and intra-trade analysis available?Yes.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes. Data is real-time for pre-trade and post-trade.

Is data for post-trade analysis real-time, end-of-day or following day?It is available in real time, at the end of day and the following day.

Contact InformationScott Burrill or Joe Gawronski212-607-3122sburrill@rblt.com or jgawronski@rblt.comwww.rblt.com

Rosenblatt Integrated Transaction Analytics (RITA)

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ADVANCED TRADING • www.advancedtrading.com • June 2010 35

Tethys Technology,Inc.Description of ServicePre-trade cost analysis is offered for global equities, including infor-mation on optimal algorithm choice. Real-time and post-trade ana-lytics are available for all asset classes (equities, options, futures andFX).

From where does the service get transaction data?Transactional data is collected by our Execta EMS platform and canalso be accepted from third-party EMS/OMS applications. Data forpre-trade cost estimates is supplied through a Tethys TCA Server andcan be accessed from an API or through a GUI client.

How frequently is data collected?Data is collected on every data tick for some parameters, and onevery order and execution transaction for other parameters.

How is the data analyzed?The data is analyzed through our proprietary TCA rules engine andwith tick-data from various data sources.

What criteria are used to measure broker execution?Broker execution is measured by slippage from various benchmarksand liquidity addition and removal (if relevant).

Are pre-trade estimates and intra-trade analysis available?Yes. Both are available.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes. Data is real-time.

Is data for post-trade analysis real-time, end-of-day or following day?Real-time.

Contact InformationMary Cogger212-509-5600sales@TethysTech.comwww.tethystech.com

TotalTCA

Thomson ReutersDescription of ServiceGlobal TCA provides an independent, cost-effective, post-trade TCAservice in global equities. Our broad set of benchmarks is calculatedusing cross-market data, allowing users to establish their perform-ance against a single defined execution venue or across venues chosen by the client.

From where does the service get transaction data?Transaction data at parent order, child order and, where appropriate,individual fills are extracted from the client’s OMS/EMS systems.Comparative benchmarks are calculated using Thomson Reuters’unrivalled historical tick data.

How frequently is data collected?The standard service is offered on a T+1 basis with clients’ datauploaded daily, weekly, monthly or even quarterly if preferred. A real-time alternative is also available as a premium service.

How is the data analyzed?Multiple benchmarks are calculated against each order and execution, where required, and stored against each record. Clientsare able to select from among benchmarks calculated from a specificvenue or across all venues trading in that stock.

What criteria are used to measure broker execution?The full suite of benchmarks is available. Orders and/or trades can be aggregated to show performance against multiple inputs,including broker.

Are pre-trade estimates and intra-trade analysis available?Intra-trade TCA is available.

Is data real-time for pre-trade estimates and intra-trade analysis?Yes. Data is real-time for intra-trade analysis.

Is data for post-trade analysis real-time, end-of-day or following day?End-of-day for our standard service and real-time for our premium service.

Contact Information312-236-4500tta.sales@thomsonreuters.comwww.thomsonreuters.com/products_services/financial/Global_TCA

Thomson Reuters Global TCA

AT_0610-Directory-v3 4/29/10 1:15 PM Page 35

Hear from Industry Leaders

October 17-19, 2010 Ritz Carlton Golf Resort, Naples, Florida

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The Buy-Side Trading Summit is an exclusive event for the most senior-level buy-side executives. If you are a buy-side trader or IT executive at a buy-side firm, this event was designed for you. This year’s event focuses on the future of the trading desk – covering topics including emerging technologies, optimizing your EMS or OMS, taking control of risk management, the future of dark pools, achieving transparency through advanced TCA tools and reacting to changes from regulation.

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Qualified buy-siders attend for free. For more information, e-mail advancedtrading@techweb.comwww.advancedtrading.com/summit2010 use code: atvip10

Network With Your Peers

Nanette J. BuziakHead of U.S. Equity Trading,ING Investment Management

Stephen P. Davenport CFA Vice President & Head of Equity Risk Management, Wilmington Trust

Arzhang KamareiPartner,Tradeworx

Michael J. LevasChief Investment Officer & Managing Member, Olympian Capital Management LLC

Chris RogersManaging Director, Manager for Asset & Wealth Management Derivative Products,Bank of New York Mellon

Rich VigsnesGlobal Head of Equity Trading,Northern Trust Global Investments

Larry TabbFounder & CEO,TABB Group

he heads of all of the major banksshould be fired. The leaders of ourindustry have poured gasoline on thebanking crisis and accelerated itcompletely out of control. It has got-ten to the point where legislators and

regulators seem to be doing their best to burn theindustry down to the ground to rid it of the evils thatcaused the crisis in the first place.

I put this squarely at the feet of our industry’sleaders. They ignored common sense, signs, hints,nudges and flat out requests to curb their risk tak-ing to the point where governments now are propos-ing rules that not only will force institutionalbreak-ups and hurt our industry, but that very wellmay cripple the capital formulation engine MainStreet needs to generate jobs. Talk about cuttingoff our proverbial nose to spite our face.

All that our industry leaders needed to do wascome together, highlight the major gaps that led tothe subprime crisis and come up with a solution tosolve the most egregious issues. Yes — in order tokeep the industry whole and the world sane, someprofitable business would need to be eliminated,sacred cows slaughtered, and sacrifices made toappease government leaders and stop the gatheringhordes from marching down the Street with torch-es and pitchforks.

Scared CockroachesBut, no. What do these guys do? First, during the worstof the crisis, they hunker down in a bunker scared ascockroaches under a spotlight. Next, they Hoover upas much cheap cash offered by the Fed and lend itback to the government — capturing more than 300basis points on each dollar and generating billions inprofits — but they don’t lend a penny to consumers orbusinesses. Then they pay record bonuses at a timewhen many Americans are losing their homes.

They also fight the consumer financial productsagency that stops institutions from creating finan-cial products designed to blow up. They protestcapital and leverage controls. They obstruct fund-ing a bailout pool for resolving failed complex insti-tutions so taxpayers don’t have to bail them outagain. And they marshal herds of lobbyists (inept-ly) to fight the curtailment of even the most obvi-ous of flagrant abuses.

So what did we get from all this lobbying? We stillhave consumer protection rules, but now we are look-ing at the Volcker Rule, which bans proprietary trad-ing; the Lincoln Bill, which moves virtually all OTCderivatives toward central clearing and exchange trad-ing and cleaves off derivatives trading into a sepa-rate, independently capitalized subsidiary; and thenewly proposed Brown/Kaufman amendment, whichlooks to cap the size of banks to 10 percent of nation-al deposits and non-depository institutions to 2 per-cent of gross domestic product. Further, the SEC nowis looking at civil actions against firms for their OTCderivatives issuance practices.

Don’t these guys understand that the more theyfight financial reform, the more legislators and reg-ulators will join the battle, the less support ourindustry will have, and the easier it will be for gov-ernments to pile on the rules and restrictions? Andif you think, “Eh, what will these guys find?” —think again. Haven’t we learned anything from theSpitzer and Giuliani sideshows? When regulators

are digging through e-mail, there will always beone idiot who says something that won’t look goodon the front page of the Wall Street Journal. Canyou say, “Fabrice Tourre?”

While most of this is now water over the dam,our leaders (either new or existing) need to ratch-et down the rhetoric, work within our communi-ty and determine which sacred cows need to beslaughtered so the industry and the global econo-my can survive. They need to offer these sacri-fices to our legislators as a peace offering andwork with the global community to ensure thatour financial markets are structurally sound andwill remain so long into the future. Otherwise wewill be playing right into the hands of our worstcritics. And that will not help the industry or theglobal economy. ■

ADVANCED TRADING • www.advancedtrading.com • June 2010 37

By Larry TabbFounder and CEO ofWestborough, Mass.-based TABB Group, a financial markets strategic advisory firm.ltabb@tabbgroup.com

The leaders of our industryhave poured gasoline on thebanking crisis and accelerated itcompletely out of control.

street cred

TA Colossal Failure of Leadership

0610_37.qxd 5/3/10 9:52 AM Page 37

hile high-frequency trading stillraises the buy side’s rancor, the real-

ity is that this type of rapid-fire, com-puter-driven trading has become the

main source of liquidity in U.S. stocktrading. Institutions may not trust the

intentions of proprietary trading firms that employ passivemarket making strategies, but even the SEC recognizes thatthe liquidity-providing function they perform is not new.

“Proprietary firms largely have replaced more traditionaltypes of liquidity providers in the equity markets, such asexchange specialists on manual trading floors and OTC mar-ket makers that trade directly with customers,” the SEC wrotein its recent concept release exploring market structure issuesincluding high-frequency trading, colocation and dark pools.

In fact, in order to survive in a speed-obsessed marketstructure, the NYSE has had to revamp its specialist modelto embrace electronic market making and offer rebates as anincentive to post bids and offers at the NBBO. Still, institu-tional investors remain skeptical about interacting with high-frequency proprietary trading firms, and several voiced their

concerns to brokers when they were informed that the NYSEhad appointed GETCO, one of the largest HFT firms, tobecome a designated market maker on the exchange floor(see “High-Frequency Trading Hits the Floor,” page 20).

“The jury is still out for the ultimate investor — they are hear-ing a lot of negativity [about high-frequency trading],” observesJoseph Cangemi, managing director and head of equity salesand trading for ConvergEx Group’s global electronic tradingunit. But, he asserts, “They are also experiencing positiveeffects of an infrastructure that held up very well [during thefinancial crisis] and performed under extreme conditions.”

But if high-frequency trading is so familiar, and if the marketfunctioned so well during the recent financial crisis, why is thebuy side still uncomfortable with the high-frequency tradingtrend? Why are institutions skeptical of proprietary tradingfirms and hedge funds that use ultrahigh-speed models?

One of the reasons that institutions question the value thatHFT brings to the market is the lack of hard data available toprove that these strategies help rather than harm long-terminvestors. While some studies show that HFT reduces spreads

on the most liquid stocks (see page 12 for more information

on Woodbine Associates’ recent study, for example), whatabout small- and mid-cap stocks? Do the interests of short-termliquidity providers really align with the rest of the market?

“Indeed, any particular proprietary firm may simultane-ously be employing many different strategies, some of whichgenerate a large number of trades and some that do not,”continued the SEC. “Conceivably, some of these strategiesmay benefit market quality and long-term investors and oth-ers could be harmful.”

The SEC admits that there is a need for clarity on HFTstrategies — which range from passive liquidity and electron-ic market making to various forms of statistical arbitrage andstructural and directional strategies, such as order anticipationand momentum ignition. Further, in response to concernsabout colocation, the SEC is looking for comment on the mar-ket structure and technology components that enable HFT.

Perhaps to ward off any rash market structure changes —and certainly to allay investors’ fears — no shortage of firmsthat engage in high-frequency trading have submitted com-ment letters to the SEC. Tradeworx, an HFT shop in Redbank,N.J., submitted a letter with in-depth examples of many HFTstrategies, including how profits are earned through rebates,according to Manoj Narang, Tradeworx’s CEO.

Narang defends HFT firms’ role in the markets. Rebates,he maintains, are necessary to compensate HFT firms for therisks they take. “Most liquid stocks trade at one-cent bid-askspreads. But in most cases, one cent is not a large enoughspread to defray the cost of adverse selection,” he explains.

High-frequency trading, Narang argues, is the liquiditybackbone of the markets, providing immediacy and fairpricing through statistical arbitrage, whereas the institu-tions using VWAP algorithms are consuming liquidity asthey are accumulating positions, creating a price impact.Pointing out that HFT strategies trade in small sizes andunwind their trades at the end of the day, Narang also refutesthe notion that HFT firms add to systemic risk.

Meanwhile, many other prominent HFT firms are steppingout of the shadows and participating more openly in the mar-ket structure. Instead of hiding behind their proprietary mod-els, they are becoming more active in defending their automatedtrading strategies. This will benefit the market’s understandingof HFT and perhaps debunk some of the myths that exist.

Even so, as high-frequency, automated market makingbecomes further embedded in the market, rules and obliga-tions for HFT traders need to be set. Then maybe institu-tions on the other side of their trades finally will feel morecomfortable with it. ■

Do the interests of short-term liquidity providers really align

with the rest of the market?

38 June 2010 • www.advancedtrading.com • ADVANCED TRADING

By Ivy SchmerkenEditor-at-Large, she covers tradingfor both Wall Street & Technology

and Advanced Trading.ischmerken@techweb.com

Out of the Shadows

W

at the close

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