advanced trading-june-2011 8055195

INTELLIGENCE FOR THE ELECTRONIC MARKETS JUNE 2011

WHO HAD THE BIGGEST IMPACT ON THE BUY SIDE IN THE PAST DECADE?

HERE ARE 10 INNOVATORS WHOSEACHIEVEMENTS PROPELLED THE TRADING

DESK INTO THE 21ST CENTURY. P.13

A supplement to Wall Street&Technology

SETH MERRIN DAVE CUMMINGS DAVID LEINWEBERBRIAN NIGITO &CHRIS ROGERS

REP. BARNEY FRANK RICHARD KORHAMMER DAN MATHISSON DAVID E. SHAW

LARRY FINK BILL PORTER

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

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Goldman Sachs Electronic Tradinggsetnewthinking.com© 2011 Goldman Sachs. All rights reserved. Member FINRA, SIPC.

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ADVANCED TRADING • www.advancedtrading.com • June 2011 3

contents

June 2011

14 Seth MerrinImagining Wholesale Change

15 Dave CummingsMarket Maker

15 David LeinweberBreaking News

16 Brian Nigito and Chris RogersA Perfect Match

17 Barney FrankThe Man Behind the Law

18 Richard KorhammerSetting Information Free

19 Dan MathissonBig Idea In Small Orders

20 David E. ShawQuantitative Thinker

20 Larry FinkA Pioneer of Modern Finance

21 Bill PorterA World of Options

PLUS:22 Protecting Your IP

Financial services firms are built

on innovation. Protecting those

advantages is a full-time job.

Making History On the Street

The past decade saw a complete upheaval onthe trading desk and a surge forward in the waytraders do their jobs. We now work at greaterspeeds and with greater efficiency than at anyother time in history. Advanced Trading presentsthe innovators who helped make it possible.

13

14 15 15

18 19 20 20 21

16 17

contents

9 MARKET INTELLIGENCEHedge Fund Managers Predict A Strong Year 2011 will see anincrease in new fund launches, aslowing of redemptions and fewerfund closings, according to a survey of hedge fund managers.

10 ANATOMY OFA TRADING FLOORDirect Access Partners Institutionalagency-only brokerage DAPfocuses on multi-asset-class executions in both domestic andinternational securities. Take anexclusive look inside the firm’snew Manhattan trading floor.

26 TRADING TECH DIRECTORYOMS Providers The trading deskmoves at a faster pace than everbefore, and the right order management system can be thedifference between execution andmissed opportunity. Our exclusivedirectory details some of the topOMS providers and their platforms.

33 STREET CREDThe Worst Form of MarketStructure? Contributing editorLarry Tabb may not be WinstonChurchill, but he recognizes aconundrum when he sees one:The markets are better than ever;so how do you fix them?

34 AT THE CLOSEWall Street Legends The real secretsauce on the Street is the creativepeople whose innovations pavedthe way for modern trading, notthe technology, says editor-at-large Ivy Schmerken.

6 EDITOR’S LETTER

videos slideshows white papers news opinions

Peter DriscollVice President,

Senior Equity Trader Northern Trust

Michel DebichePresident and CEO Quantia Capital

Management

Floyd ColemanU.S. Head Trader AXA Rosenberg

Tim OlsenSenior Vice President/

Head TraderICM Asset Management

Jason ValdezHead of Global Equity Trading

Penserra Securities

Joan StackTrading Manager

Ohio Public EmployeesRetirement System

Rob ShapiroExecutive DirectorMorgan Stanley

Investment Management

Bryan KievitHead Trader

Accipiter CapitalManagement

Reader Advisory Board

4 June 2011 • www.advancedtrading.com • ADVANCED TRADING

advancedtrading.com

DODD-FRANK CHEAT SHEETCompliance Help At nearly 1,000 pages long, the Dodd-Frank Wall Street Reformand Consumer Protection Act is dense, confusing and often mind-numbing.Fortunately, we read it for you. And our Cheat Sheet is less than 40 pages. And it’s free. advancedtrading.com/dodd-frank

TRADING FLOOR PHOTOSNomura Securities “Our first priority was to build out our systems and architecture,mostly from scratch,” senior managing director Ciaran O’Kelly reports of Nomura’spush to expand its U.S. equities trading operation. Check out exclusive photos ofNomura’s new Wall Street trading floor. advancedtrading.com/photos/nomura

VIDEOIs High-Frequency Trading Hitting a Wall? As trading gets faster and faster, the technology barriers get higher and higher. According to Larry Tabb, only the biggestfirms can compete in the HFT space. Unless the small guys can find a niche, he adds,they’ll have to get out of the game. advancedtrading.com/tabb-on-hft

TRADING TECH DIRECTORYDark Algorithm Providers Don’t be afraid of the dark. Advanced Trading’s directory ofdark algorithm providers can help you find the tools you need to source liquidity inthe opaque markets. advancedtrading.com/directory/dark-algos

SEC REGISTRATION SURVIVAL GUIDEAfter years of operating in the shadows, hedge funds are about to bethrust into the light. Under Dodd-Frank, most hedge funds have toregiter with the SEC by July 2011. To help you survive life under theSEC, we present the SEC Registration Survival Guide — everythingyou need to know about the registration process and complying withthe SEC’s rules. advancedtrading.com/digital-edition/may2011

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omehow I’ve become the old guy in the office. Atthe wizened age of 46 I can tell stories about lifebefore email, when you had to pick up documentsat the fax machine and when only doctors and drugdealers carried pagers (forget smartphones).

At one job, the HR rep told me excitedly that I would have my very ownAOL account. Just weeks before I started working there, I was told, theoffice had to share a single account. Coworkers would place a flag attachedto a paperweight next to their Gateway PCs so that everyone would knowwho was using the account; if you needed to check your “electronic mail,”you could ask that person to sign off and hand over the flag. If it sounds alittle like “Little House on the Prairie,” it was.

When 20-somethings complain about Windows 7 crashing once a week,I think back to Windows for Workgroups 3.11. Those were the days. Onedesigner would foresee a crash coming and yell “Save!” to the entire mag-azine staff so everyone would store all of their work in progress beforethe server went down. And we all ooh’d and aah’d when we were informed

that the server now had an awesome new amount ofstorage for our files: a whole gigabyte! Today we have8 GB on our iPhones (and it still isn’t enough for allof our music and photos).

Looking back, the 1990s were a remarkable time.We had a federal surplus, a thriving entrepreneurialculture and record-low unemployment. (If you didn’thave a job from 1995 to 2001, it was probably yourfault.) During this decade, operating systems becamemore stable, chips gained power and speed, and net-works became more robust and widespread. Sure, the

innovations did take some getting used to — back then, few people felt com-fortable typing in their credit card numbers and hitting “send,” for example.

Now, however, thanks to the innovations of the 1990s, we live in a faster,more convenient (if frustrating) world. We work at greater speeds and processmore information than at any other time in history. And the trading deskresembles a NASA control center rather than the exchange floors of the past.

In this special issue of Advanced Trading, we take a look at the peoplewhose ideas and systems are used by today’s traders and broker-dealersto navigate the markets. From the advent of machine-readable news to theintroduction of new alternative trading systems to the launch of a comput-er-based hedge fund strategy, the innovations put forth by our group ofpioneers forever changed the direction of the Street.

So where does innovation originate? It comes from problem solving andopportunity and the desire to make more money than the next guy. Evenan old editor like me knows that.


SBack In My Day …

editor’s letterVolume 7, No. 3

VP/GROUP PUBLISHERJohn Ecke 212.600.3097 [email protected]

EDITORIALEditor-in-Chief Phil Albinus [email protected]

Group Content Manager Les Kovach [email protected] Ivy Schmerken [email protected]

Associate Editor Justin Grant [email protected] Managing Editor Nathan Conz [email protected]

Contributing Editor Larry Tabb [email protected]

ARTKristen Terrana, Igor Jovicic, Tony Vecchione

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VP, Editorial Director, InformationWeek Business Technology Network Fritz Nelson

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UNITED BUSINESS MEDIA LLCSVP, Strategic Development and Business Administration Pat Nohilly

SVP, Manufacturing Marie Myers

Phil Albinus, Editor-in-Chief@PhilAlbinus

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©2011 JPMorgan Chase & Co. All rights reserved. J.P. Morgan (“JPM”) is the global brand name for JPMorgan Chase & Co. and its subsidiaries and a� liates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries, conducted primarily through J.P. Morgan Securities Ltd. (“JPMSL”). Execution services are o� ered through J.P. Morgan Securities LLC (member of FINRA, NYSE and SIPC), JPMSL (member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered O� ce 125 London Wall, London EC2Y 5AJ), J.P. Morgan Securities (Asia Pacifi c) Limited (CE number AAJ321) (regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong), and other investment banking a� liates and subsidiaries of J.P. Morgan in other jurisdictions worldwide and registered with local authorities as appropriate. Please consult http://www.jpmorgan.com/pages/jpmorgan/investbk/global for more information. Prime brokerage services, including clearing and custody services, are o� ered by J.P. Morgan Clearing Corp. (member of FINRA, NYSE and SIPC). Product names, company names and logos mentioned herein are trademarks or registered trademarks of their respective owners.

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market intelligence

magnified by the crisis, many have recently announcedincreased allocations to non-traditional investments, includinghedge funds and private equity funds.”

Because hedge funds are growing increasingly reliant oninstitutional capital, the survey found, an overwhelming major-ity have become less willing to make leveraged bets.According to the report, nearly 78 percent of hedge fund man-agers are using leverage significantly less in their investmentsnow than they did before the 2008 crisis.

“As institutional capital has become more influential, thehedge fund industry has generally scaled back leveragedinvesting further,” Kelly Easterling, a principal in RothsteinKass’ Walnut Creek, Calif., office, wrote in the report.

To illustrate the growing influence of institutional capital onhedge funds, the research points out that in 2007, only 20 percentof managers expected institutional investors to be the dominantsource of capital for the industry. Three years later that figuresoared dramatically, with 70 percent of managers now predictinginstitutional funds will be the key source of capital for hedge funds.

But as those institutional clients invest big money in hedgefunds, they’re demanding that their money managers tightentheir operational structure. According to the survey, 92 percentof fund managers are focusing more closely on due diligencein 2011 to appease regulators and investors.

“Everything — including organizational structure, reportingprocess, technology and service provider relationships — is afactor in capital-raising efforts,” Jeff Kollin, head of RothsteinKass’ financial services advisory unit, added in the report. “Thisis consistent with our advice to clients to act institutional.” ■

A clear majority of hedge fundmanagers predict that 2011 will be astrong year for new launches, slower

redemptions and fewer closures, according to a survey con-ducted by the accounting and audit firm Rothstein Kass. Theresearch also found that as hedge funds become more institu-tional in nature, many are looking to beef up their managementteams, with a growing number of firms placing a larger empha-sis on operations, compliance and technology.

In a survey of 313 hedge fund managers conducted inJanuary, Rothstein Kass found that nearly 75 percent expectthere to be more fund launches in 2011 than last year. Further,nearly 63 percent of participants predicted fewer hedge fundswill close, and 80 percent said the pace of redemptions willslow down this year. According to Rothstein Kass, 70 percentof the funds surveyed manage less than $500 million.

Compliance Provides a Confidence BoostMeanwhile, an increased emphasis on compliance — whichbegan across the hedge fund industry prior to the passage ofthe Dodd-Frank Act in mid-2010 — has been a boon for investorconfidence, the research found. As a result, hedge funds willsee a wave of new investments from institutional clients suchas pension funds, endowments and sovereign wealth fundsthroughout 2011 and beyond, Rothstein Kass reported.

“The hedge fund industry has dynamically benefitted fromthe market recovery,” Rothstein Kass co-chief executiveHoward Altman wrote in the firm’s report. “With pensionplans working to overcome significant funding shortfalls

appy days evidently are hereagain for hedge funds, even asthe fragile global economicrecovery plods along and thespecter of increased regulatoryscrutiny looms over the industry.

Despite the precarious economic recovery and intensifying regulatory scrutiny,managers expect an increase in new hedge fund launches, a slowing ofredemptions and fewer fund closings in 2011. By Justin Grant

HHedge Fund ManagersPredict a Strong Year



ounded in 2002 as a floor broker,Direct Access Partners opened a new trading floor in lowerManhattan in May 2010. With 54work stations, the New York floor houses eight traders focusing onmulti-asset-class executions in

equities, fixed income and options, includingboth domestic and international securities. Theinstitutional agency-only brokerage also runs afloor brokerage operation on the New YorkStock Exchange with a dozen or so traders inone of the NYSE’s new trading pods. In addition,DAP, which acquired the U.S. equity trading teamof Kellogg Partners in January 2011, has eighttraders in Miami who cater to internationalclients and five traders in its Boston office servicing mutual fund clients in the region.

Featuring:

Ben Chinea, CEO and Founder (above): “We want the financialservices community to know we’re a source of alternative capital,”says Chinea. “Whether your’e a start-up fund, emerging manager or an established fund, we have a solution with capital, technology,clearance and execution.”

Photography by Stephen Aviano

Reported by Ivy Schmerken

FDirect Access Partners

anatomy of a trading floor


DAP executes multi-asset trades in 115 globalmarkets through relationships with brokers on theground in local markets. It also has a growing multi-prime brokerage business that it clears throughGoldman Sachs, Bank of America Merrill Lynch andPershing/BNY Mellon. “Last year, we were one of sixbrokers that were approved to introduce prime toGoldman Sachs, “ notes CEO Chinea.

Jeff Khouw, CTO (right), developed a proprietary risk platform for options trades. He also developed an automatedaccount-opening application to streamline the informationflowing from multiple clearers into Fidessa for allocations. As aresult, DAP now has “a master system with all of the productsacross systems and clearers so there’s a single identifier,” hesays. In addition, Khouw tapped Fidessa’s tools to build pre-trade risk controls for monitoring client’s DMA-routed orders.

advancedtrading.comFor dozens of additional photos of Direct AccessPartners’ New York trading floor, visit: advancedtrading.com/photos/DAP.

Mike Shea, Managing Partner,Institutional Sales and Trading(left), focuses on domestic equi-ties. Shea says he uses the FidessaOMS/EMS platform (second screenfrom right) for monitoring Level IIdata and for accessing a full suiteof algorithms and dark poolaggregators. He uses BloombergLaunchPad (far left screen) fordata and charts, and BloombergChat (second monitor from left) to communicate with clients,though Shea says he also hasclients who prefer AIM — AOL’sinstant messenger. DAP uses ahighly customized version ofSalesforce.com (far right screen)for tracking account coverage.

William Reekstin, ManagingDirector, Global Equities (left),relies on Fidessa in addition to a variety of EMSs, includingGoldman’s RediPlus (top leftscreen), BofA Merrill Lynch’sInstaQuote (far left, bottom) and TradingScreen (top right). “We aggregate business from different parts of the world,” says Reekstin, whose buy- andsell-side clients are based in Latin America, Europe and Asia.

DAP’s New York floor features 54 workstations.The firm’s business is a hybrid of high- and low-touch service, says Chinea. “Most clients are callingfor the trader’s input and feedback,” he says. “It’snot about a high-frequency strategy.” Clients typi-cally are investment managers looking for marketcolor and sentiment. “It’s more about the analysis of data and market intelligence,” Chinea adds.

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The groundwork for the electronic revolutionin the capital markets was set in the 1990s, whenpersonal computers debuted, microprocessorsdoubled in speed, networks expanded and oper-ating systems stopped crashing every 18 minutes.Then along came Advanced Trading’s Top 10

Innovators of the Decade, who each played abig part in Wall Street’s renaissance, if you will.(It’s easy to forget that as little as 15 years ago thefloors of the exchanges were still littered withpaper and the most cutting-edge machine for settling trades was the fax machine.)

In devising this list, AT’s editors, together withthe editors of Wall Street & Technology, chose theindividuals who had the biggest impact on the waytraders and brokers do their jobs. We looked atpeople who created true before and after moments,people whose innovations unleashed the power ofelectronic markets. Bill Porter and the other creators of the International Securities Exchange,for example, saw an opportunity to introduce elec-tronic trading to the world of options, an asset

class that experts previously thought could be traded only on the floor of an exchange with ahandshake between broker and trader. The rest,they say, is history (see page 21 for details).

Of course, there are plenty of people Advanced

Trading could have profiled who we passed over,such as Steve Jobs and Mark Zuckerberg, the undis-puted innovators who ushered in the new age ofmobile computing and social media. And some ofour choices — including Rep. Barney Frank, theMassachusetts Democrat whose name is on the mostsweeping financial reform law in half a century —may raise some eyebrows. (What did Frank innovate,you ask? Talk to the folks who are advising you aboutregistering your hedge fund with the SEC.)

As always, we welcome your comments. Did wemiss any innovators from the past 10 years whodeserved recognition on our list? Did we give someonetoo much credit? Drop us a line and say your peace.Until then, enjoy reading about the accomplishmentsof our Top 10 Innovators of the Decade. Thechanges they inspired are the stuff of history. ■

t was seismic, but at the time, it was almost too easy to miss. Ten years agothe financial markets moved from paper-based processes that were rife witherrors to electronic platforms that opened the gates for faster transactionrates and exploding trade volumes. Appropriately, if you blinked, you missedthe transformation.I

Making History


Imagining Wholesale Change

Merrin’s idea was to enable the buy side to find the naturalcontra, or the other side of the trade, without involving thebroker as intermediary. But he was not the first to look to solvethe problem this way; there were other attempts in the 1990s.

Optimark flamed out after spending $400 million, theArizona Stock Exchange was equally unsuccessful, andattempts by Fidelity and Morgan Stanley also failed, accordingto Merrin, an ex-arbitrage trader who invented the order man-agement system in the 1980s, paving the way for electronictrading. “None of them could figure out how to create a criticalmass of buy-side liquidity in a short enough time,” he says.

Merrin acknowledges that the obstacles were massive. First,the idea hinged on getting institutions to share their orderflow. “We went to the buy side and we said, ‘Give me all ofyour orders.’ Nobody had ever asked for that,” Merrin recalls.

Next, Merrin needed to convince providers to add his mar-ketplace to their OMSs. To pressure them, he formed anadvisory group — of each of their largest buy-side customers.

As he drew up his business plan, Merrin calculated that heneeded 100 buy-side firms live on Liquidnet on Day One to cre-ate critical mass. As launch day grew closer, he revised thatnumber down to 75, ultimately launching in April 2001 withjust 38 institutions. But in the 10 years since, Liquidnet’s mem-bership has skyrocketed to more than 630 asset managementfirms around the world, representing total assets of more than$12.5 trillion. And the firm has expanded across the globe, offer-

ing the buy side access to 39 equity markets on five continents.Merrin describes his innovation as “creating marketplaces

that enable institutions to trade in size with the efficiency thatthey sorely need.” In the U.S., Liquidnet’s average executionsize of 50,000 shares is 200 times the size of the 250-share averagetraded in all lit and dark venues; Liquidnet’s average executionin international equities is 100 times larger than the average.

The Innovations Keep on FlowingMerrin’s next big innovation, in September 2005, was launchingH20, a service that brings in retail-size flow — from DMA aggre-gators, agency brokers, exchanges and ECNs — against whichinstitutions can match part of their orders in real time whilecontinuing to wait for a block match in the negotiated pool.Analysts praised the strategy as a way for Liquidnet to tapinto sell-side liquidity to increase its match rates, while main-taining its closed institutional system. “The real innovationhere is to bring institutional liquidity and broker liquidity intothe institutional marketplace,” according to Merrin, who saysH20 is a continuation of Liquidnet’s strategy.

“The last place that institutions want to execute is ‘outthere.’ Every order that an institution sends to the publicmarketplace sends out signals that the high-frequency traderstake advantage of,” Merrin asserts.

But Liquidnet continues to face competition from agencybrokers — the likes of ITG, Instinet, Pipeline and PulseTradng’s BlockCross. And the blotter-scraping technologypioneered by Liquidnet is now the subject of patent infringe-ment lawsuits among three of these players. But none ofLiquidnet’s competitors focus exclusively on the buy side— Liquidnet’s No. 1 distinguishing feature.

Meanwhile, Merrin is onto his next big idea — bringingthe corporate market into the wholesale marketplace. Aspart of its global expansion, Liquidnet is partnering withinternational exchanges that use its dark pool technologyto help them create a wholesale market that also providesLiquidnet’s members with access to more liquidity.

“Our job over the next decade is to make the world asmaller, more efficient place to invest,” says Merrin. And hesounds determined to make it happen. ■

hen Seth Merrin pitched an idea in 1999 for a wholesale electronic marketplacewhere institutional investors could trade large blocks of stocks, he was out to solvea problem: While the Internet had revolutionized retail trading during the dot-comera, “It totally bypassed the whole world of institutional trading,” contends Merrin.The market structure, he says, had not kept up with the growth of institutional assets.W

Against the odds, Liquidnet founder Seth Merrin created an institutionalmarketplace for block trading where others had failed. By Ivy Schmerken


Market Makerix years ago, after Nasdaq and the NYSE gobbled upInstinet and Archipelago, Tradebot Systems founderDave Cummings saw an opportunity. While those behe-moths set about consolidating the market and raisingprices, Cummings started a relatively obscure electronic

communication network that would become BATS GlobalMarkets, a growing force in the exchange space.

But Cummings hesitates to classify his idea as an innovation.“The initial notion was obvious — we just neededto replace Instinet,” he says. “Then, after we hadit up and running for six months or a year, therewas a notion that we could go even further thanwe did. There was a gaping hole to be playedbecause the industry over-consolidated.”

Cummings parlayed his vision into a global firmthat’s now home to the third-largest U.S. securitiesmarket and Europe’s second-biggest alternative

trading platform. Under Cummings’ watch, the firm filled its cof-fers by offering broker-dealers rebates in exchange for liquidity,a tactic Direct Edge, another alternative exchange, has sinceleveraged to rise to prominence. And at year’s end, BATS — shortfor Better Alternative Trading System — plans to list public U.S.shares, giving companies their first chance in years to sell equitydomestically on a platform outside the traditional exchanges.

Although Cummings resigned from BATS in 2007 as it pre-pared to become an exchange, he says the compa-ny’s unique customer-oriented approach enabled itto become a worthy rival to NYSE and Nasdaq. “Thewhole justification for the original mergers was toeliminate competition so they could raise prices,”says Cummings, who returned as chairman to auto-mated trading firm Tradebot after leaving BATS.“As a customer, we don’t like that. We made a com-petitive playing field by restoring competition.” ■

S

ell most people that they’re being profiled as anInnovator of the Decade and they will thank you.David Leinweber asks playfully, “For which achieve-ment?” It’s not bragging if it’s true.

Currently head of the Caltech Center for InnovativeFinancial Technology, Leinweber has played a significant rolein the development of algo and high-frequency trading. In fact,he’s been around electronic trading for so long that he remem-bers when HFT was called “second (and then half-second) trad-ing.” But thanks largely to Leinweber’s innovations in the fieldof machine-readable news, in particular, high-frequency strate-gies today can trade on breaking developments in milliseconds.

The evolution of Leinweber’s idea, however, took a little longer.In the early 1980s Leinweber oversaw real-time applications ofartificial intelligence at the RAND Corporation. This work ledhim to form in 1987 Integrated Analytics, which unveiledQuantEx, a revolutionary e-trading platform. After IntegratedAnalytics was acquired by ITG in 1990, Leinweber moved toFirst Quadrant, where he oversaw $6 billion in institutional quan-

titative global equity portfolios. Then,in the late ’90s, he and an officemategot the bug to start Codexa, anInternet-based information collating,aggregation and filtering service.

Instead of reading the Wall Street Journal or squinting atbreaking news on CNBC, Leinweber’s service allowed financialnews to be reduced to digital elements, metatagged and fed intoinvestment firms’ trading models, enabling computers to identifytrading opportunities in a fraction of the time it would takehuman traders to act. “You need new news ... to reach alpha,”Leinweber explains. “You need a measure of novelty, importance— such as new management, credit ratings, downgrades, etc.”

While today Wall Street black boxes depend on machine-readable news, Leinweber acknowledges that he faced skep-ticism at first. “In the 1970s, people said computers wouldnot be able to play a decent game of chess,” he recalls. “In1997, IBM’s Deep Blue played Garry Kasparov. And now,Watson is on Jeopardy.” ■

TBreaking News

With a fire hose of aggregated updates, David Leinweber devised a service thatallows trading strategies to react to news the instant it breaks. By Phil Albinus

Where others saw trouble, Dave Cummings saw opportunity. His vision for an ECN spawned BATS and reshaped the trading landscape. By Justin Grant


A Perfect Match

Before the two innovators collaborated on any code,they shared a dorm room at the Stephens Institute ofTechnology in Hoboken, N.J. After graduation, theyworked together at Internet start-up Mail.com. When thedot-com bubble burst, they looked for work on Wall Street.Both Nigito and Rogers ended up at Tradescape, a day-trading firm that had an afterhours trading platform calledMarketXT, which they promptly integrated into Nasdaqas a small order execution system (SOES) participant.“We were the only SuperSOES ECN,” notes Rogers.

Their work attracted the attention of Island, and Nigitoand Rogers joined the firm within a week or so of each other.In 2002, shortly after Island was acquired by rival Instinet,which was owned by Reuters, Nigito and Rogers werecharged with rewriting Island ECN founder Josh Levine’smatching engine from DOS into Java. The result was INET.

Initially, Instinet moved its ECN business onto INET andset up a dark pool, rebranded as Continuous Block Crossing,or CBX, on Instinet’s legacy platfrom for its broker-dealerbusiness. “The Island system [INET] was much more effi-cient in terms of machine utilization but was very simple,while the Instinet system was feature-rich,” says Nigito.

As a result, according to Nigito, he and Rogers createda hybrid that “used the heart” of Island’s INET matchingengine but had the look and feel of the old Instinet text-based terminal “that was near and dear to clients.” AddsRogers, “Over the course of a couple of months, wemoved over all the order flow from the broker-dealercommunity over to the Island system.”

After the integration, Rogers and Nigito each struck off

on his own; Rogers moved on to a consulting gig atManhattan Beach Trading, and by 2004 Nigito left to serveas director of high-frequency trading at Citadel InvestmentGroup in Chicago. But the pair would reunite in 2005.

When Reuters sold Instinet, sending the INET ECN toNasdaq and the institutional brokerage business ultimatelyto SilverLake Partners, the team was called on again. Underits non-compete clause with Nasdaq, SilverLake/Instinet couldnot operate CBX as an ECN in the U.S.; but no one said any-thing about international trading or dark pools, Nigito recalls.

In short order, he and Rogers rewrote the CBX matchingengine along with Instinet’s entire software infrastructure.“That became the basis for Chi-X Europe,” Nigito notes.

Today, the technology that Rogers and Nigito developedfor Instinet not only is the basis of Chi-X Europe, whichhas captured close to 30 percent of the FTSE 100 volumeand 17 percent of volume in pan-European stocks, butalso Chi-X Canada, Chi-X Japan and Chi-East. And Instinet,which was acquired by Nomura in 2007, continues to useNigito’s and Rogers’ technology for all of its dark poolsglobally, including its new options dark pool, OptionsCBX.

It Takes TwoNigito is quick to point out that he and Rogers couldn’thave achieved so much individually. “While I was ableto code this, I don’t think I would be able to make thiswhole thing happen operationally,” Nigito says, addingthat he relied on Rogers for the back-end support andoperational deployment.

“I was a bit of a perfectionist,” Nigito admits. “Chriswas the great complement.” If Nigito were slow to finisha project, Rogers “would steal files off my computer. …He’d get it done,” Nigito says.

Nigito recently left Getco after five years as head of theHFT firm’s New York office. While he can’t talk aboutwhat he worked on while he was there, sources say hebuilt Getco’s dark pool and worked on building an optionsmarket-making business. And while Nigito is essentiallybarred for a year from pursuing future plans, it’s hard toimagine he and Rogers not getting together again. ■

ou could say ex-college roomates Brian Nigito and Chris Rogers are something ofa dynamic duo. Together, Nigito, who recently left high-frequency trading firmGetco, and Rogers, currently CTO at Instinet, have driven electronic trading tonew heights over the past decade with their work on a series of matching engines,including Island’s ECN, the INET ECN and Instinet’s Chi-X. Y

Together, Brian Nigito and Chris Rogers have rewritten the electronic trading landscape. By Ivy Schmerken

Brian Nigito (left) and Chris Rogers (right)


The Man Behind the Law

The Dodd-Frank Wall Street Reform andConsumer Protection Act forces nearly all financialservices firms to rethink how they do business, fromwhich stocks they trade to how they disclose termsto clients. And if the nearly 70 years it took for theindustry to overturn the Glass-Steagall Act serve asany indication, Frank’s influence undoubtedly willbe felt throughout the industry for decades to come.

The 70-year-old Harvard Law School graduateplayed a pivotal role in preventing global finance fromtumbling over the brink. Frank, who presided overthe powerful House Financial Services Committee asthe 2008 Wall Street collapse unfolded, helped craftthe unprecedented banking sector bailouts. Strippedof his committee chairmanship following theRepublican takeover of the House last fall, the CapitolHill powerbroker now says the Democrats did enoughwith the Dodd-Frank Act during their time controllingboth houses of Congress to thwart a similar crisis.

Back From the Brink“We came very close — according to Bush adminis-tration officials — to a situation as bad, if not worsethan the Great Depression,” Frank tells Advanced

Trading. “We had two things to do: First, deal withthe crisis; but then do whatever we could to make itless likely it would happen again.”

Despite a push by Republicans earlier this year toneuter the Dodd-Frank Act by slashing funding forthe regulatory bodies tasked with making rules toenforce the new law, Frank says the bill is nowequipped to work as planned. In April the nation’scommodities and securities regulators were givenmodest budget increases, which should aid theirimplementation of the Dodd-Frank Act.

Frank says the GOP ultimate-ly backed down on its threat toslash funds for the Securitiesand Exchange Commission andCommodity Futures TradingCommission because thatstance was unpopular with vot-ers. “A budget cut was their sideattack on the rules. Theycouldn’t deal with it head on, sothey tried it this way,” he says,noting that Republicans havesince shifted their focus to delay-ing derivatives reform until 2012.

House Republicans introduceda bill this spring that would delaynew derivatives rules for 18months. Although that legislation has little chance ofbecoming law since it’s unlikely Senate Democratsor President Obama would support it, Frank says thetactic is a dangerous move for the GOP.

“They’re making a great mistake politically to putoff any new regulation of derivatives,” Frank con-tends. “That’s going to be very unpopular when youlook at the people’s concerns about speculation.”

While Frank is mostly pleased with how the billturned out, he acknowledges that it hasn’t been soldeffectively enough to the general public. And he wish-es the law were tougher on the derivatives market.But for the most part, Frank says, the Dodd-Franklaw is as tough as it needs to be.

“The bad mortgages, risky securitizations — I can’ttell you that it’s going to prevent new problems,” Frankadmits. “But if you look at all the causes of problemsin the past, we made them much less likely to occur.” ■

rom the decriminalization of small amounts of marijuana to gay marriage,Barney Frank has been at the forefront of liberal causes throughout his threedecades as a member of the U.S. House of Representatives. But when his timerepresenting Massachusetts’ fourth congressional district is up, Frank likelywill be remembered for two things: his colorful personality, and the co-authoring

of the most dramatic rewrite of the laws governing the nation’s financial system sincethe Great Depression.

F

Outrage over Wall Street’s failures inspired the most sweeping financialoverhaul since the Great Depression. Barney Frank, the man whosename is on the bill, only wishes he had gone further. By Justin Grant


Setting Information Free

At a time when electronic communication networks andalternative trading systems such as Instinet and Island wereproliferating, Korhammer saw a need for consolidation.Traders needed access to each of these venues to ensurethat they were getting best executions. But because theearly ECNs were focused on day traders, each had its ownfront end — and institutional traders couldn’t fit 10 frontends on a screen. Lava Trading untangled the mess by aggre-gating feeds from the various ECNs into one location.

Korhammer had been grounded in the reality of tradingright out of college. A Princeton University electronic engi-neering graduate, he went to work at Steve Jobs’ NeXT,which offered the NeXT Computer workstation. “One ofmy stints with the company was working on Wall Streethelping technical traders with computer science back-grounds,” says Korhammer. “I got to experience the strate-gies that firms like UBS and First Boston were trialing atthe time. It opened my eyes to what Wall Street was.”

Korhammer tapped that experience to build Lava’s plat-form from an institutional trader’s perspective. Unlike theother guys, “We routed to wherever and whoever achievedthe best price,” he says, likening Lava to cable television,which aggregates channels from various providers. Andlike cable TV, it was addictive for traders. By 2002 Lavawas handling 10 percent of Nasdaq’s volume.

Breaking Down BarriersOf course, Korhammer faced barriers. Foremost amongthem, sell-side brokers wanted customers to use their pro-prietary order management systems to place trades. Lavasought to be a central OMS that would pass electronic infor-mation to the sell-side brokers. “They didn’t want Lava tocommunicate with their systems,” Korhammer notes. “Wehad to create very technical workarounds.”

But Korhammer knew how to tap a crucial ally: his insti-tutional customers. “We got clients to pound the table todemand access from the sell side,” he says.

From there, Lava’s growth was meteoric. Of course,

offering unique products that meet market needs has atendency to drive that kind of growth. But Korhammeracknowledges at least one regret, of sorts — not addingvarious classes of securities, such as the foreign exchangeoffering Lava introduced in 2004, to the platform faster.

Citi sold LavaFX to FXall in January 2010. Now livingin Brisbane, Australia, Korhammer is still innovating. Heis chairman of the Receivables Exchange, which enablescorporate clients to sell their receivables for immediatecash — bringing the centuries-old practice of factoring toan exchange. In the past, firms would negotiate with asingle bank when factoring; the Receivables Exchangeallows 50 firms to bid for a company’s receivables.

Korhammer also is involved with Asia Online, a com-pany that’s seeking to automate language translations.And he is keeping an eye on auto-sensing application pro-gramming interfaces (APIs), which he describes as “tech-nologies that have the ability to readily adapt to commu-nicating with other providers in real time.”

Like all of Korhammer’s great ideas, it’s about freeingthe flow of information to bring people together. And he’sgot a pretty good track record for attracting the right peo-ple to bring those ideas to life. ■

o hear Richard Korhammer tell it, Lava Trading was the result of the rightpeople coming together to turn a good idea into a great reputation. But from itsfounding in 1999 until its sale to Citibank in 2004, the trading platform providerwas guided by Korhammer’s vision — though he is quick to share credit with co-founder Kamran Rafieyan, the firm’s chief investment officer.T

Richard Korhammer built Lava Trading to give institutional traders a better view of the market. Today, he’s still working to create newways to unlock the power of information. By Chris Sandlund


Big Idea In Small Orders

A decimalized environment, Mathisson says, promoted bid-ding wars. “Everyone was penny jumping, and quotes were con-stantly flickering up or down by the second,” he recalls. “It wasvery difficult for traders to navigate. If they came in with anysize, they would be penny jumped, so they started [manually]chopping their orders into smaller orders.”

All day on the trading desk, Mathisson recalls, he would hearcomplaints about having to slice up orders. “That is when thelight bulb went on,” he says. “I had the technology to trade in anautomated basis and thought, ‘It wouldn’t be so hard to automatestrategies that adjust quotes and send orders in smaller pieces.’”

About a month after decimalization hit Nasdaq stocks,Mathisson presented a one-page business plan to management.As a result, Credit Suisse would gain a first-mover advantage inthe algorithmic trading space for two years.

Innovation Upon Innovation At the time, Mathisson’s boss, Bob Jain, co-head of global equi-ties, was weighing an independent idea to set up an electronicagency execution team. “Till that point, broker technology wasused to support your own traders, but noone had given clients access to their trad-ing technology,” Jain says.

“When I came to him with this idea for amachine to chop up orders,” Mathissonadds, “he put it together with his agencyexecution concept and said, ‘Let’s do this.’”

According to Mathisson, now managingdirector of Credit Suisse’s AdvancedExecution Services, the success of his algomachine was based on its ease of use. “Ourproduct was aimed at traditional clientswith no technology skills. The idea was tomake the computer interact with tradersthe way a floor broker does,” he says. WhileCredit Suisse had competitors, such asITG’s Quantex, they required coding and

technical skills — and that was the differentiator. “Ours wasthe first product aimed at traders,” Mathisson says.

But making the idea a reality was a challenge. “I had an ideabut had no idea how to make it real,” Mathisson acknowledges.Fortunatley, James Doherty, head of product development, “wasable to make the back end reliable and elegant and not cost afortune,” Mathisson relates. The initial product was built andreleased internally on a Credit Suisse platform in February 2002.

“We gave it out to anyone within Credit Suisse who wanted touse it,” Mathisson recalls, noting that the first algo was a plainvanilla Volume Weighted Average Price (VWAP) tool, but it wasthe first time traders could control a maximum percent of vol-ume and put in a limit price from their workstations. “The algowas integrated into trading flows, was easy to use and the fillscame back exactly the same way they always did,” he explains.

Internally, he notes, the product was a hit, but it was not gen-erating any revenue. “We thought, ‘How do we distribute thisthing?’” Mathisson relates. “We didn’t want to have computerson people’s desks — it would be too hard to support. We debateda web offering, but the web wasn’t that mature at the time.”

Enter Robert Maher, head of AES salesfor the EMEA. Maher had the innovative(in 2001) idea to offer traders access to theproduct through a third-party system ratherthan distribute and install software.

A deal to provide Credit Suisse’s algos viathe Bloomberg terminal was quickly negoti-ated and overnight Credit Suisse’s algo prod-uct was in the hands of tens of thousands oftraders. The sales pitch was simply, “Justwalk over to your Bloomberg terminal andtry it.” And traders flocked to it.

By the end of 2002, the business tookoff. “From 2002 to 2004, we saw outrageousgrowth,” Mathisson recounts. In fact, itwasn’t until 2004 that Credit Suisse startedto run into competitors. ■

hen stat arb trader Dan Mathisson was plucked from D.E. Shaw in Spring 2000 to runCredit Suisse’s prop desk, he had no idea that he would soon take part in an innovativeeffort that would radically transform equity trading. At the time, Mathisson ran a spreadcapture strategy that required wide spreads to make money. When decimalization hit in2001, his strategy was destroyed, a setback at the time that would drive him to create a

new way of trading and earn Mathisson and Credit Suisse a place in Wall Street history.W

With the idea to create a machine to automatically dice up large orders, Credit Suisse’s Dan Mathisson helped launch the age of algorithms. By Kerry Massaro


Quantitative Thinkerven in founding the D.E. Shaw Group in 1988, DavidShaw was an innovator. For starters, he was one ofthe first statistical arbitrage traders to leave a bulge-bracket firm (Morgan Stanley) to start his own hedgefund. Even more innovative was the way he went

about getting investors — rather than follow convention andpitch the fund as being run by a super genius who could pickwinning stocks (think: George Soros or Steve Cohen), Shawmarketed his fund as one based on computer-driven models.

“He was the first person who said, ‘I am not a super geniuswho knows the way the yen is going to go. I’m doing analysisand using computers to trade ... based on historical data,’”according to one Wall Street veteran who requested anonymi-ty. “That was a unique way to set up a fund.”

To fulfill his vision, Shaw hired a team of Ph.D.s to createthe fund’s trading models — an innovation that, in essence,set the modern standard for hedge funds; the majority of

funds now trade soley based onmathematical models.

Today Shaw lets the Ph.D.s runhis firm’s models, while he contin-ues to innovate in another field.Shaw returned to full-time scientificresearch, where he got his startbefore becoming a trader, and nowleads research in the field of com-putational biochemistry as chief scientist at D.E. Shaw Research.

In the late 1990s, Fortune magazine referred to Shaw as“King Quant” because of his firm’s expertise in quantitativetrading. But the quantitative models Shaw created more thana decade ago continue to shape the markets. Much of thelanguage that currently defines quant trading can be tracedback to Shaw’s early work, and many of the latest innovationsin electronic trading are built on his vision. ■

E

David E. Shaw launched the modern hedge fund industry when he created one of the first purely computer-driven funds. By Kerry Massaro

he finance industry as we now know it essentiallybegan in the late 1970s with the creation of themortgage-backed securities business, just as LarryFink was cutting his teeth on Wall Street. Longbefore becoming chairman and CEO of BlackRock,

Fink was busy helping create the securitization market,arguably the defining financial sector of the early 21st century.

After graduating from UCLA’s Anderson School ofManagement in 1976, Fink went to work as a bond trader atFirst Boston. Three years later he was running the firm’smortgage-backed securities unit, a role in which he wouldhelp shape Wall Street. Along with Lew Ranieri, at the timea bond trader and vice chairman at Salomon Brothers, Finkis credited with building the practice of securitization —buying debt such as mortgages and credit card balancesfrom lenders, dicing them up and reselling them to investors— into the global, multitrillion-dollar business that it is today.

“The mortgage-backed business is basically the beginning of the securitization business,” explains Larry Tabb, founder

and CEO of Tabb Group. “And thesecuritization business is basicallythe story of modern finance.

“The ability to understand andrearrange cash flows, fixed-incomeanalytics or the analytics behindinterest payments is the whole sto-ry of modern finance. ... This guywas core to making that happen.”

Fink’s career appeared to reach its nadir between 1986and 1988, when his strategies lost millions of dollars forFirst Boston. But after being forced out of the firm in 1988,Fink teamed up with several partners to form the asset man-agement firm Blackstone Group.

Over the next 17 years, Fink built BlackRock into a jugger-naut that manages more than $3 trillion in assets. “He’s clearlyone of the most powerful guys on the globe,” Tabb says.“Because of the assets and commissions he controls, they canforce the Street to do pretty much whatever they want.” ■

TA Pioneer of Modern Finance

Before he ran the world’s most powerful asset manager, Larry Fink helped craftthe securitization business and thus, the story of modern finance. By Justin Grant


A World of Options

“Everyone believed that options were too complexto trade and you needed physical contact on the floorbetween brokers and market makers, and that was theorigin of floor-based trading for all derivatives in theU.S.,” recalls David Krell, now chairman and amongthe first two employees hired at what would becomethe International Securities Exchange, the first elec-tronic exchange for options. “So coming up with awhole new approach that was very different from theconsensus view was radical at the time.”

The need was clear, according to Gary Katz, presi-dent and CEO of ISE. “Imagine a world where youdidn’t know how many contracts you could trade.When you looked at the options markets, they onlyshowed quotes and they didn’t show size,” he says. “Ifyou were a professional, you didn’t know if you couldtrade at that price — you had to go to the floor, andthe floor would only honor that quote for customers.”

Secret to SuccessIn 1997, Bill Porter, who founded online brokerage E-Trade in the early 1990s, and colleague MartyAverbuch hired Katz and Krell, a pair of options expertswho hailed from the New York Stock Exchange, tobuild the first electronic options market. The fourworked on the project in secret just at the time whencomputer networks were expanding, operating systemswere becoming more stable and microprocessors weredoubling in speed every 18 months.

“We had to find market makers, we had to hire a staff,we had to hire a whole team. We had to get the computersand build two data centers and get approval from theSEC,” Krell says of the numerous challenges the groupfaced. He points out that this was the first time in 27years that the SEC approved a brand-new exchange thatwas not “grandfathered” from an existing marketplace.

While the road was long and often arduous, the debut

of the ISE on May 26, 2000, forever changed the wayoptions were traded. “It was the first all-electronicoptions exchange in the U.S. — the first exchange tobring a great deal of functionality and change into theoptions market,” says Katz.

“As Bill said on a few occasions at the time, it wasan overnight success that took three years,” adds Krell.According to the ISE website, today the exchangetrades more than 2,000 underlying equity, ETF, indexand FX options each day. (Eurex acquired ISE in 2007and runs ISE as an independent subsidiary.)

Along the way to that ultimate success, the ISEachieved a few other firsts: It was the first exchange thatprovided size along with quotes. “It was the first to havea front-end terminal for brokers and traders who wantedto interact with the market. And it was also the first thatbrought intermarket competition, in that market makerswere able to quote and compete with each other to pro-vide the greatest size to the market,” according to Katz.

Did the men who founded ISE realize the importanceof what they were doing? Katzsays yes, but at the time he hadto keep it to himself. “I told myfather when there were onlyseven of us working on it andI could not really tell him whatwe were doing,” he shares. “Isaid it was going to change theway markets trade forever.”

Porter and Averbuch couldnot be reached for this profile.Porter lives in Hawaii, accordingto ISE officials, and Averbuch isretired from the president andCEO role of Adirondack TradingPartners, a consortium formedto finance the ISE. ■

t is said that necessity is the mother of invention; for E-Trade founder Bill Porter,so, too, has been opportunity. In the mid-1990s, finance professionals thought thatoptions could be traded only by hand, face-to-face, via established relationships. Whileother asset classes were making their way onto electronic platforms, bonds andoptions seemed destined to remain a gentlemen’s club where only a human touch

could pass an option from one trader to another. I

Bill Porter’s vision for the International Securities Exchangeopened a new world to options traders — their very own electronic exchange. By Phil Albinus

Keeping Secrets

“Financial services companies are seeking to protecttheir intellectual property assets with different forms ofprotection,” comments Allan Soobert, a partner with theintellectual property practice of New York-based Paul,Hastings, Janofsky & Walker, which represents major finan-cial institutions in patent and infringement matters.“Patents are one way of protecting IP; copyrights are anoth-er, and trade secrets are significant, as well. That mix of IPprotection is really what you see in the marketplace.”

Many aspects of financial serv-ices are worth protecting, fromonline transaction systems toautomated approval processes.The creator of new software canseek copyright protection fromthe U.S. Copyright Office, Soobertsays. In theory, the copyright actu-ally is enforceable upon the com-pletion of the source code, heexplains, but a copyright holdergets additional rights once the completed software is regis-tered officially with the copyright office, a step that pre-cludes anyone from copying that software.

“But with copyright protection, you have to disclose it,which has an effect on your ability to protect it as a tradesecret,” points out Chad Yohn, chief IP attorney at NewYork-based broker-dealer and technology companyConvergEx Group, which recently received its ninth patent,this one for LiquidPoint, an electronic options-trading plat-form. “We view the patents we have as assets of the com-pany,” Yohn says.

But in a highly secretive field such as high-frequency trad-ing, firms are reluctant to disclose innovations to the U.S.Copyright Office. “Copyright protection is narrow — it pro-tects the program as written,” Yohn explains. “Someone cangain an understanding to the underlying logic and they caninvent around the patented software program.” As a result,firms often forego registering for copyright protection.

The recent intellectual property case involving the theft ofhigh-speed trading software developed by Goldman Sachs

illustrates the point. Goldman accused a former softwareprogrammer of stealing source code from a high-frequencytrading system for a new employer, a start-up competitor,Teva Technologies. The programmer, Sergey Aleynikov, wasconvicted in December 2010 of stealing proprietary code,and in March he was sentenced to eight years in prison.

One of the factors in Aleynikov’s sentencing, accordingto experts, was his disregard for IP rights, including implicitcopyright and trade secret protections. Several IP lawyers

interviewed for this story noted that Goldman clearly would-n’t want to disclose the details of its trading system in apatent. “They’d rather keep their secret sauce behind closeddoors,” says one attorney who spoke only on the conditionof anonymity because his firm was not involved in the case.

Disclosure Has Its BenefitsIn exchange for full patent disclosure, however, firms geta “better return,” suggests Steve Lieberman, a partnerwith Washington, D.C.-based intellectual property lawfirm Rothwell, Figg, Ernst & Manbeck. Lieberman wasthe lead counsel for ITG in a patent infringement lawsuitbrought by Liquidnet related to block trading systems.“In the trading technology space, financial services com-panies have come to see that patents are very important,”he says. A second suit by Liquidnet against rival brokerPulse Trading is still pending.

“A patent issued by the U.S. Patent and TrademarkOffice is a legal monopoly — it gives you the right to stopanyone else from doing what’s covered by the patent inthe United States. That’s why patents are such powerfultools in the financial industry — because they can shutdown a competitor’s product,” says Lieberman.

“A patent gives you a monopoly over the product for20 years,” he adds. “And you can enforce the monopoly

inancial services firms build their fortunes on the back of innovation. Whetheryour firm has devised a new high-frequency trading strategy or launched an innovativemobile banking product, no doubt your company wants to protect its market positionfrom competitors. But that’s more complicated than it sounds.F

“We view the patents we haveas assets of the company.”—Chad Yohn, ConvergEx Group

Financial services firms build their businesses on innovation. Protecting those advances is a full-time job. By Ivy Schmerken


with an injunction against the competitive product.”But patents aren’t air tight, Lieberman acknowledges. “In

litigation, patents can be found to be narrow and not infringed,and they can be found to be invalid or unenforceable,” he says.

Before diving into the patent application process, a com-pany should weigh the benefits, says ConvergEx’s Yohn. Theanalysis includes looking at the longevity of the innovation.The U.S. Patent and Trademark Office generally takes threeto six years from application to issuance, so if the innovationis in a fast-moving field, there may not be anything left todefend once the patent is issued, Yohn notes.

“We want to be viewed as innovators in the investmenttechnology space, and we think that our patents supportthat,” he adds. But rather than file for a patent, ConvergExmay rely on trade secret rights as protection. In that case,Yohn explains, the company can keep the nature of how itdeveloped or implemented the innovation confidential.

To protect something as a trade secret, “You have to demon-strate that you maintained the confidential nature of that inno-vation, and you have to further demonstrate that there has beena breach of that confidential information and that someone hasmisappropriated that secret,” explains Yohn. But, he cautions,“It takes a lot of cooperation — from the sales team to the legalteam to the product team — to maintain confidentiality.”

In fact, part of establishing that an innovation is a tradesecret is requiring any employee or consultant who comesinto the company to sign a confidentiality or proprietaryrights agreement, according to Yohn. A classic example isCoca-Cola, which has successfully protected the formula forCoke as a trade secret for about 150 years.

The down side? “If someone is able to reverse engineerwhat’s inside the black box, you have no protection,” explains

Rothwell Figg’s Lieberman. “In order to [truly] protect thatinnovation, you need a patent.”

According to Paul Hastings’ Soobert, many financial serv-ices firms aren’t using patents to go after companies infring-ing on their IP; rather, companies are using patents to protectthemselves against lawsuits from competitors. “They areusing the patents to protect their assets in a defensive way,”Soobert says. “In case they are sued, they have the patentsin their arsenal to protect their assets.”

‘Trolling’ for PatentsFinancial services firms could encounter patent “trolls” or“non-practicing entities” that buy up patents and then go onlitigation sprees. “These companies don’t make anything; theyjust buy up other people’s assets,” explains Marc Pernick, apartner in the Los Angeles office of law firm MorrisonFoerster with expertise in intellectual property litigation.

One contentious case in banking involves DataTreasury,a small tech company that registered a patent for remotecheck imaging in the 1990s. Banks were not convinced thatthey needed the technology until Congress passed a lawallowing digital check processing in 2003. Then banks beganinventing their own remote imaging applications, unawarethat DataTreasury held a patent on the technology. Sincethen, DataTreasury has sued nearly every major bank forinfringing on its electronic check imaging patent.

But even when a financial services firm holds a patent, thelitigation can go on for years, Pernick notes, adding that it’sexpensive and distracts from operating the main business.“Patent litigation costs millions,” he says. “Small cases can cost$1 million, and larger, more complicated ones can cost $5 millionor $10 million.” Which is why so many settle out of court. ■

Arecent court decision has castdoubt on whether many businessmethods are eligible for patents.

The decision, which ruled that businessmethods can be too “abstract” to be patent-ed, could impact financial services compa-nies seeking patents on business methodsthat are not tethered to technology.

On June 28, 2010, the Supreme Courtaffirmed a lower court’s ruling in theBernard Bilski patent case, which sought toprotect a method that enabled commodi-ties dealers to minimize risk through hedg-ing contracts. “All nine justices agreed thatBilski’s hedging patent was too abstract orthat it was not tethered to a concrete phys-ical application and was too close to the

generic concept of a hedge,” relates MarcPernick, partner and intellectual propertylitigator at law firm Morrison Foerster.

“The Supreme Court ... said there is noabsolute problem with business methodand financial services patents,” Pernickadds. “But if they are too abstract, thenthey are no good.”

Pernick points out that there aregrounds within Section 101 of the U.S.Patent Act itself for prohibiting patentson ideas that are too abstract. But, hestresses, “for many years it was notapplied with teeth.”

Following the Supreme Court’s decisionin the Bilski case, according to Pernick, thePatent Office and the lower courts have

begun to scrutinize patents more thor-oughly. The Bilski decision also has openedup new ground for declaring that existingpatents are invalid, he adds. “The PatentOffice and the lower courts have made ittough on financial-services-related andbusiness-method patents,” Pernick says.

To make patents more likely to withstandchallenges, Pernick advises, firms should tiethem to computers and other physical tech-nology. “That is certainly the best clue thatwe have about how to insulate your patentin the financial services area,” he says. “Themore a firm ties its invention to specificrouters, databases and physical devices, thebetter your chances of surviving one ofthese patent attacks.” —I.S.

When Patents Attack


Protecting Your IP


with an injunction against the competitive product.”But patents aren’t air tight, Lieberman acknowledges. “In

litigation, patents can be found to be narrow and not infringed,and they can be found to be invalid or unenforceable,” he says.

Before diving into the patent application process, a com-pany should weigh the benefits, says ConvergEx’s Yohn. Theanalysis includes looking at the longevity of the innovation.The U.S. Patent and Trademark Office generally takes threeto six years from application to issuance, so if the innovationis in a fast-moving field, there may not be anything left todefend once the patent is issued, Yohn notes.

“We want to be viewed as innovators in the investmenttechnology space, and we think that our patents supportthat,” he adds. But rather than file for a patent, ConvergExmay rely on trade secret rights as protection. In that case,Yohn explains, the company can keep the nature of how itdeveloped or implemented the innovation confidential.

To protect something as a trade secret, “You have to demon-strate that you maintained the confidential nature of that inno-vation, and you have to further demonstrate that there has beena breach of that confidential information and that someone hasmisappropriated that secret,” explains Yohn. But, he cautions,“It takes a lot of cooperation — from the sales team to the legalteam to the product team — to maintain confidentiality.”

In fact, part of establishing that an innovation is a tradesecret is requiring any employee or consultant who comesinto the company to sign a confidentiality or proprietaryrights agreement, according to Yohn. A classic example isCoca-Cola, which has successfully protected the formula forCoke as a trade secret for about 150 years.

The down side? “If someone is able to reverse engineerwhat’s inside the black box, you have no protection,” explains

Rothwell Figg’s Lieberman. “In order to [truly] protect thatinnovation, you need a patent.”

According to Paul Hastings’ Soobert, many financial serv-ices firms aren’t using patents to go after companies infring-ing on their IP; rather, companies are using patents to protectthemselves against lawsuits from competitors. “They areusing the patents to protect their assets in a defensive way,”Soobert says. “In case they are sued, they have the patentsin their arsenal to protect their assets.”

‘Trolling’ for PatentsFinancial services firms could encounter patent “trolls” or“non-practicing entities” that buy up patents and then go onlitigation sprees. “These companies don’t make anything; theyjust buy up other people’s assets,” explains Marc Pernick, apartner in the Los Angeles office of law firm MorrisonFoerster with expertise in intellectual property litigation.

One contentious case in banking involves DataTreasury,a small tech company that registered a patent for remotecheck imaging in the 1990s. Banks were not convinced thatthey needed the technology until Congress passed a lawallowing digital check processing in 2003. Then banks beganinventing their own remote imaging applications, unawarethat DataTreasury held a patent on the technology. Sincethen, DataTreasury has sued nearly every major bank forinfringing on its electronic check imaging patent.

But even when a financial services firm holds a patent, thelitigation can go on for years, Pernick notes, adding that it’sexpensive and distracts from operating the main business.“Patent litigation costs millions,” he says. “Small cases can cost$1 million, and larger, more complicated ones can cost $5 millionor $10 million.” Which is why so many settle out of court. ■

Protecting Your IP

Arecent court decision has castdoubt on whether many businessmethods are eligible for patents.

The decision, which ruled that businessmethods can be too “abstract” to be patent-ed, could impact financial services compa-nies seeking patents on business methodsthat are not tethered to technology.

On June 28, 2010, the Supreme Courtaffirmed a lower court’s ruling in theBernard Bilski patent case, which sought toprotect a method that enabled commodi-ties dealers to minimize risk through hedg-ing contracts. “All nine justices agreed thatBilski’s hedging patent was too abstract orthat it was not tethered to a concrete phys-ical application and was too close to the

generic concept of a hedge,” relates MarcPernick, partner and intellectual propertylitigator at law firm Morrison Foerster.

“The Supreme Court ... said there is noabsolute problem with business methodand financial services patents,” Pernickadds. “But if they are too abstract, thenthey are no good.”

Pernick points out that there aregrounds within Section 101 of the U.S.Patent Act itself for prohibiting patentson ideas that are too abstract. But, hestresses, “for many years it was notapplied with teeth.”

Following the Supreme Court’s decisionin the Bilski case, according to Pernick, thePatent Office and the lower courts have

begun to scrutinize patents more thor-oughly. The Bilski decision also has openedup new ground for declaring that existingpatents are invalid, he adds. “The PatentOffice and the lower courts have made ittough on financial-services-related andbusiness-method patents,” Pernick says.

To make patents more likely to withstandchallenges, Pernick advises, firms should tiethem to computers and other physical tech-nology. “That is certainly the best clue thatwe have about how to insulate your patentin the financial services area,” he says. “Themore a firm ties its invention to specificrouters, databases and physical devices, thebetter your chances of surviving one ofthese patent attacks.” —I.S.

When Patents Attack

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Directory of Order Management System ProvidersJune 2011

Advent Software/Moxy . . . . . . . . . . . . . . . . . . . . . . . . . 26

Bloomberg LP/AIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Charles River Development/Charles RiverInvestment Management System (IMS) . . . . . . . . . 27

ConvergEx’s Eze Castle Software/Eze OMS . . . . . . 28

Fidessa/Minerva OEMS . . . . . . . . . . . . . . . . . . . . . . . . . . 28

INDATA/Precision Trading . . . . . . . . . . . . . . . . . . . . . . . . 29

Investment Technology Group/Macgregor XIP . . .30

Linedata/Linedata Longview . . . . . . . . . . . . . . . . . . . . 30

SGGG Porfolio Systems . . . . . . . . . . . . . . . . . . . . . . . . . 31


*This is not a comprehensive list of order management systems providers. Advanced Trading invited other providers to participate in the directory, but they could not submit their information by press time. Providers entered their owninformation, which has been edited for space. For additional information on these companies, as well as directories ofother capital markets technology providers, see our online directories at www.advancedtrading.com/directories.

powered by

Advent SoftwareDescription of System:Moxy, which is deployed at more than 850 firms worldwide, automates and streamlines the trading and order managementprocess, from portfolio construction through settlement.

What order-management functionality does the system offer?Asset allocation, portfolio modeling and rebalancing, pre- and post-trade compliance, electronic trading, dark pool and algorithmic trading integrations, custodial notification, and post trade utilitiesfor settlement and clearing.

What proprietary EMS functionality is included?N/A

Does the OMS integrate with any external EMSs?Yes, Moxy integrates to any EMS system of choice for our clientsusing FIX connectivity.

Which version of FIX does the OMS run?4.0 and 4.2.

For which securities is the system designed?Global multi-asset capabilities, including equities, fixed income, and listed derivatives.

Which derivatives are supported?Listed options, futures, commodities and OTC derivatives.

Does the system handle international securities?Yes.

How is ongoing support priced?Term licensing model includes tiered support costs built into the annual fee.

With which accounting systems does the OMS integrate?Integration to Advent Accounting products (Axys, APX, Geneva) isstandard. Moxy also can integrate to any third-party accountingplatform.

Is there a remote, or “light,” version of the OMS that can beused for business continuity/disaster recovery?Yes, Advent has a licensing model for BC/DR that is approximately50 percent of the annual license.

For what size and type of firm is the system ideally suited?With more than 850 firms ranging from $100 million to $60 billionin AUM, Moxy is a flexible system capable of handling many clientprofiles. Advent serves institutional asset managers, wealth managers, hedge funds, bank/trusts and broker-dealers with theMoxy platform.

What future enhancements are planned?Enhanced modeling capabilities, increased instrument coverage,expanded deployment options via the Advent OnDemand SaaSmodel, and international trading requirements.

Contact Information:John [email protected]

Moxy

directory of order management system providers


Bloomberg LPDescription of System:AIM is Bloomberg’s buy-side order management system for order creation, staging and routing, position management, andcompliance, through to financing and middle-office applications for trade matching and settlement.

What order-management functionality does the system offer?AIM offers order management applications for most asset classes,including fixed income, equities, OTC and derivatives to both internal and external execution platforms.

What proprietary EMS functionality is included?AIM offers the Bloomberg EMS platform to all AIM clients. This is a broker-neutral platform that integrates more than 1,500 destinations globally. The differentiating factor is the integration of real-time Bloomberg Data and Analytics.

Does the OMS integrate with any external EMSs?Yes. AIM integrates with several EMS platforms including Redi+,Triton, RealTick, Passport, Neovest, and Lava via FIX. AIM also willestablish FIX connections to any major EMS application.

Which version of FIX does the OMS run?AIM Integration to EMS systems is currently based on FIX 4.2. AIMdoes have the ability to integrate on FIX 4.4 if requested.

For which securities is the system designed?AIM supports most asset classes — global fixed income, equities andequity options, OTC products, derivatives, and FX all are supported.

Which derivatives are supported?AIM supports CDSs, IRSs, index and single-name equity TRSs, listedfutures and options, OTC options, and FX futures and options.

Does the system handle international securities?Yes. Bloomberg AIM is a global system. We handle fixed income,equity, derivatives and currencies from more than 100 countries.

How is ongoing support priced?24/7 support for the AIM platform is included with the licensing fee.

With which accounting systems does the OMS integrate?AIM integrates with most recognized accounting packages withminimal custom integration. For unique packages, integration canbe established leveraging our middleware software, which is included with the basic AIM licensing fee.

Is there a remote, or “light,” version of the OMS that can beused for business continuity/disaster recovery?With Bloomberg AIM, there is no need for a “light” version for BC/DR.As an ASP, Bloomberg hosts the services, and through the BloombergProfessional, the services can be accessed from anywhere in the world.

For what size and type of firm is the system ideally suited?AIM can be configured for any size asset manager, from firms with$100 million to $100 billion in AUM. AIM currently has 500-plus clientsglobally, supporting both traditional asset managers and hedge funds.

What future enhancements are planned?AIM will continue our focus on globalization, expanding our productcoverage around the world. Enhanced cash management, FX trading,middle-office tools and dynamic integration options are also in focus.

Contact Information:Patrick J [email protected]/enterprise/trading_solutions/buy_side_oms

AIM

Charles River DevelopmentDescription of System:The Charles River Investment Management System is a multi-curren-cy, multi-asset-class front- and middle-office software suite that sup-ports 24/7 global operations and real-time electronic FIX trading.

What order-management functionality does the system offer?Charles River IMS provides comprehensive functionality for decisionsupport and portfolio management; order management and e-trad-ing; real-time pre-trade, post-execution and end-of-day compliancemonitoring and management; and centralized post-trade processing.

What proprietary EMS functionality is included?Broker-neutral, integrated EMS capabilities include trading interfaceswith 30-plus broker providers of algorithms; pre-/post-trade TCA; in-trade execution monitoring/analytics; DMA; automated order routing;integration with data providers for real-time information; programtrading; integrated watch lists/charting; and customization options.

Does the OMS integrate with any external EMSs?FIX-based staging to external EMS systems is supported.

Which version of FIX does the OMS run?Charles River Development supports FIX versions 4.0, 4.2, 4.4.

For which securities is the system designed?All asset classes, including U.S. and international equities, listed andOTC equity options, fixed income, FX, futures and complex derivatives.

Which derivatives are supported?Options, Futures: single-stock, bond, index. Interest rate swaps. Credit Default Swaps: single-name, index, index tranche, basket. Cross-currency interest rate swaps. Constant maturity swaps. Overnightindexed swaps. Asset swaps. Basis swaps. Inflation Swaps. Total ReturnSwaps: equity, fixed income, basket. IRS swaptions. CDS swaptions.Credit-linked notes. Mexican TIEE swaps. Brazilian pre-DI swaps.

Does the system handle international securities?Yes. The system handles securities from most global markets and is

used by domestic firms trading internationally and by local firms inmore than 30 countries around the globe.

How is ongoing support priced?The annual lease for Charles River IMS includes provision of supporthours sufficient to address most clients’ support requirements. Ifneeded, additional hours are available at an hourly rate.

With which accounting systems does the OMS integrate?Advent Axys, Checkfree Security APL, DST GPS, DST InfoQuest, EagleSTAR, FIN, FMC Pacer, IBS VPM, IDS GIM 2, Metavante, Princeton PAM,SunGard Invest One, SunGard AddVantage, and Thomson PORTIA.

Is there a remote, or “light,” version of the OMS that can beused for business continuity/disaster recovery?The Charles River IMS architecture supports multiple options for highavailability/disaster recovery. Additionally, the Charles River Anywherecomponent is a browser-based application that extends critical func-tionality to remote users via mobile devices or Internet-connected PCs.

For what size and type of firm is the system ideally suited?Charles River IMS supports investment firms in the institutional,mutual fund, banking, hedge fund, wealth management, insuranceand pension industries — ranging from less than $1 billion in AUMto more than $50 billion in AUM.

What future enhancements are planned?Further expansion in EMS capabilities, including additional algorith-mic, market data and TCA provider integration; enhanced portfoliomanagement and analysis tools for equity/fixed income/derivatives;and a new performance measurement and attribution module.

Contact Information:Brian Basiliere, Sales [email protected]

Charles River Investment Management System (Charles River IMS)

ConvergEx’s Eze Castle SoftwareDescription of System:The Eze OMS is a global, multi-strategy OMS leveraging a real-timeopen architecture to streamline the investment cycle for all assetclasses. It provides functionality for portfolio management, compliance, trading and operations.

What order-management functionality does the system offer?Multi-currency, multi-strategy, multi-asset-class functionality. Flexiblereal-time trade blotters, PM blotter and/or compliance blotter; event-driven decision support analytics; flexible modeling and “what-if”analysis; automated asset allocation and order generation; real-time,intraday P&L and historical P&L; liquidity exposure and analysis; FIXorder routing to more than 500 sell-side destinations; more than 650algorithmic strategies from more than 60 brokers; single-screen ordergeneration and allocation for any asset class; execute list/programtrades; pre-trade, intratrade and post-trade compliance checks; flexiblerule creation and management; rules libraries; open architecture forintegration with third parties, including 250-plus established interfaces;commission management; and real-time monitoring and alerting.

What proprietary EMS functionality is included?Single-click DMA to more than 65 global markets, accessing 95 percent of the world’s liquidity; FIX order routing; access to Level I and II market data; time and Sales, TCA, and market watchesand charts. Eze supports broker-neutral access to algos, dark poolsand crossing networks for multiple asset classes.

Does the OMS integrate with any external EMSs?The Eze OMS leverages a real-time open architecture to integrate withvirtually any third party. We have established FIX connectivity, API andSOA interfaces with the following ECN, ATS and DMA platforms: Fidessa,FlexTrade, FutureTrade, Instinet, ITG Channel, Liquidnet, Liquidpoint,MarketAxess, Morgan Passport, Neovest, Newport, Portal, Portware,Radical, Triton, RealTick, REDIPlus, Sonic, InstaQuote, Tradeweb, TradingScreen, Trading Stream, Trading Technologies, Triact and UNX.

Which version of FIX does the OMS run?4.0, 4.1 and 4.2

For which securities is the system designed?The Eze OMS leverages an event-driven, service-component architecture designed to support all securities, including globalequities, listed equity options, OTC equity options, fixed income, foreign exchange, futures and credit derivatives.

Which derivatives are supported?Both OTC and listed derivatives are supported, including forwards,futures, options, swaps, fixed income and credit products.

Does the system handle international securities? Yes.

How is ongoing support priced?All support is included in the annual licensing fee for the product.Eze Castle Software does not charge additional fees for implemen-tation, upgrades, or any ongoing maintenance and support.

With which accounting systems does the OMS integrate?The Eze OMS has established integrations with many accountingsystems, including Advent Axys, Advent APX, Advent Geneva, BNYM– AIS, Beauchamp, CheckFree APL, DPM, Eagle, Electra, EPAMPrinceton, FIN, IFA, Linedata MFACT, P2K, PMIS, SEI, SS&C Total Return,SS&C AdvisorWare, SS&C, Hedgeware, SS&C Pacer, Simcorp, SunGardInvest One, SungGard Shaw, SunGard VPM, Thomson FinancialPortia, and Tradar. The Eze OMS’s flexible architecture enables integration with proprietary accounting systems as well.

Is there a remote, or “light,” version of the OMS that can beused for business continuity/disaster recovery?The Eze OMS provides failover/standby capabilities. It supportsremote access via Citrix, Terminal Services or external network connectivity via trusted connections. Eze Mobile users can accesscritical trading and compliance functionality via handheld device orweb browser. Eze Hosting provides preferred access to leading infrastructure providers offering ASP solutions for hosting off-site.

For what size and type of firm is the system ideally suited?Eze OMS clients consist of traditional asset managers, hedge funds,mutual funds and pension funds ranging from $500 million to $200 billion in AUM and from one user to 130 users.

What future enhancements are planned?For more information about our Product Road Map, [email protected].

Contact InformationSean [email protected]

Eze OMS


FidessaDescription of System:Minerva OEMS provides comprehensive order management and execution management in a single system, and is used by the world’slargest global asset managers through to specialist hedge funds.

What order-management functionality does the system offer?Simple order creation, including generic orders; order capture frommultiple sources; comprehensive pre-trade investment restrictionchecking; and electronic, broker-neutral trading of equities, fixedincome, derivatives and FX direct from the order blotter. The MinervaOEMS offers broker-neutral, low-latency trading with instant connec-tivity to 530 brokers globally; a wide range of broker algorithms; DMAfor global equity and listed derivatives markets; single and list orders;real-time execution benchmarks; display of externally calculated analytics; pre-trade TCA; full support for fixed-income and quote-driven trading methods; support for global trading requirements;real-time cash viewer for current and future positions; automatic, real-time allocation of executions to block orders; multiple allocation algorithms; automatic calculation of commissions and fees; full

support for softing, crossing, directed commissions and stepouts; andtrade confirmation, both manually and via Omgeo CTM or OASYS.

What proprietary EMS functionality is included?Broker-neutral, low-latency trading across the Fidessa network, withintegration with all major ECNs, including Liquidnet, Channel ITG,Tradeweb, MarketAxess, BondVision, FXall, FXConnect and more; real-time Level 1 and 2 market data, news, charting, IOIs, and market and sec-tor indices; and calculation of simple user-defined trading strategies.

Does the OMS integrate with any external EMSs?Orders can be sent directly to Alternative Trading Systems and ECNsvia FIX, and can also be executed via DMA. Any executions receivedcan then be sent downstream to an order matching application inthe middle office or directly to the back office via the standard API.

Which version of FIX does the OMS run?Minerva OEMS is agnostic to which version of FIX is run. It can supportversion 4.4, but most Minerva OEMS clients currently use version 4.2.

(continued on next page)

Minerva OEMS



Fidessa (cont.)

For which securities is the system designed?

Full asset class support for equities, fixed income, listed and OTCderivatives, money markets, and FX.

Which derivatives are supported?(We are continually adding support for new asset classes.) Interest Rate:par swap, ad hoc swap, swaption cap & floor. Bond Option Credit: assetswap, credit-linked note, total return swap. Credit Default Swap: single-name, CDS index, CDS. Inflation: zero coupon IIS; year-on-year IIS. FX: FXoptions — vanilla and barrier non-deliverable forwards. Equity: OTCequity options, equity swaps — price return and total return.

Does the system handle international securities?Fidessa’s buy-side has a global customer base trading a variety ofinstruments, including international equities, bonds, and listed andOTC derivatives, denominated in multiple currencies with full FXhedging capabilities.

How is ongoing support priced?Unlimited support is included in the annual license fee.

With which accounting systems does the OMS integrate?There is no restriction on the fund accounting systems with which

Sentinel can integrate. A sample list of systems with which Fidessa’sbuy-side has already integrated includes DSTi’s HiPortfolioMultifonds, Linedata’s Icon IDS GIM II, Simcorp’s Dimension Portia,SunGard’s Decalog, Pleiades’ T-Star, Eagle’s PACE, Tradar, LinedataBeauchamp, and SunGard InvestOne, as well as many in-house systems and data warehouses.

Is there a remote, or “light,” version of the OMS that can beused for business continuity/disaster recovery? N/A

For what size and type of firm is the system ideally suited?Minerva OEMS is suited to global asset managers with desks in multiple locations, as well as smaller boutique investment managers, wealth managers and hedge funds.

What future enhancements are planned?Further support for money markets, program trading and TCA.

Contact Information:Cindy [email protected]

Minerva OEMS

INDATADescription of System:Precision Trading, INDATA’s broker- and network-neutral OMS, linkstraders with portfolio managers, executing brokers, and compliance andback-office staff in real time, resulting in error-free trading. PrecisionTrading is part of the IMS Suite of products. The system is available as anin-house or hosted/ASP solution with full technology outsourcing.

What order-management functionality does the system offer?Portfolio Modeling, Compliance and Analytics: robust portfolio model-ing and rebalancing, and comprehensive “what-if” analysis acrossasset classes; multi-security swapping features along with condition“if/then” order generation; multi-currency, multi-asset trading; taxlot tracking tools; family and group trading capabilities; and fullyintegrated analytics. Real-Time Pre- and Post-Trade Compliance:monitoring, including regulatory compliance; easy-to-use compli-ance wizard for rule setup and maintenance; “what-if” scenario forcompliance rules and real-time checks; easy rule customization.Electronic Trading: handles automated directed brokerage and step-out creation; real-time blotter analytics with complete integration oflive pricing and analytical data from third-party providers; and otherEMS functionality, including effective program and list trading tools,extensive connectivity with established algorithmic tradingproviders and dark pools, integration with third-party TCA providers,connectivity with all major ECNs, electronic order routing via FIX,and extensive commission tracking and reporting capabilities.

What proprietary EMS functionality is included?Real-time data and analytics are available directly within the system.Precision Trading is one of a few broker-neutral and network-neutralsolutions within the space. Unlike other providers, INDATA doesn’t“take a toll” from brokers by maintaining its own FIX network.

Does the OMS integrate with any external EMSs?Yes — most major EMS solutions within the marketplace, via FIXconnectivity and API.

Which version of FIX does the OMS run?All FIX versions supported, including 4.4.

For which securities is the system designed?All major asset classes are supported — both domestic and interna-tional (i.e., equities, fixed income, cash instruments, futures, options,derivatives). Long/short.

Which derivatives are supported?Fixed Income/Derivatives: Handles all fixed-income security types;includes specialized trading modules for mortgage-/asset-backed securi-ties and cash management, interest rate swaps and credit default swaps.


How is ongoing support priced?Annual recurring fee includes software updates and new versionreleases. In addition, other services are available (customization,training, etc.) for an hourly fee. All version upgrades are included inthe client agreement with no additional costs. In addition, INDATAmaintains a full-services offering that allows OMS clients to out-source their system administration.

With which accounting systems does the OMS integrate? Interfaces include Advent Axys, Advent APX, GIM 2000, Pacer, PORTIA, CheckFree Security APL, FIN, All SunGard platforms (PORT,Portfolio One, etc.), all Trust Accounting systems from SunGard(AddVantage, Charlotte, etc.), SEI, InfoVisa, and most other industryportfolio accounting systems.

Is there a remote, or “light,” version of the OMS that can beused for business continuity/disaster recovery?Yes, in addition to a full-service, real-time DR offering.

For what size and type of firm is the system ideally suited?The range of assets under management is from $50 million to morethan $100 billion. The typical client is a buy-side asset managementfirm with a blend of institutional, taxable accounts, mutual funds,and hedge funds. INDATA has a number of clients that use the system for the trading of international securities and also has clientsthat use the product exclusively for fixed-income trading.

What future enhancements are planned?Ongoing enhancements to underlying functionality.

Contact Information:Sylvia [email protected]

Precision Trading (Part of the IMS Suite of Products)

Investment Technology GroupDescription of System:Macgregor XIP is a broker-neutral solution that combines portfoliomanagement and trading applications with a fully integrated andsupported financial services network. Designed to help asset management firms execute their investment decisions with increasedspeed, control and efficiency, Macgregor XIP is customizable, extensi-ble and easily integrated with your preferred internal and externalapplications to correspond with the way you do business.

What order-management functionality does the system offer?Portfolio Management: With comprehensive equity, fixed income andderivatives functionality and a multifactor order-generation optimiz-er, Macgregor XIP enables you to make faster, more accurate deci-sions that are closer to your portfolio limits. Perform “what-if” analy-sis with integrated real-time market data to determine the pre-tradeimpact of proposed orders. Model and rebalance to target againstindexes, statistical models, composites and cash flows. Display unlim-ited security-level attributes and unlimited, alphanumeric user-defined fields. Run a full pre-trade compliance check to ensureadherence to investment and regulatory guidelines. Customize port-folio holdings views in a spreadsheet-style grid. And more.

Trading: Macgregor XIP includes advanced electronic trading capa-bilities and multi-security execution tools. Locate liquidity withglobal electronic connectivity to exchanges, ATSs, ECNs, numerousbroker algorithms and more than 350 broker destinations. Includesintegrated access to the ITG POSIT crossing suite and ITG singlestock, list-based and dark algorithms. Integrate easily with third-party EMSs or ITG Triton, ITG Radical or Channel ITG. Generate atrade ticket unique to the security type with full audit trail andonline historical trade data. Manage orders easily with trading capa-bilities for programs, lists and single stocks. Analyze execution costs,manage risk and analyze broker performance with integrated pre-trade and post-trade analytical tools ITG Logic and ITG TCA.

Optional Modules: ITG Compliance and Macgregor Post-Trade arestandalone applications also available fully integrated with MacgregorXIP for a truly comprehensive enterprise solution. Automate pre-tradeand portfolio-level compliance and improve reporting capabilitieswith Macgregor Enterprise Compliance. Macgregor Post-Trade is anASP solution designed to automate downstream trade processing,including matching, confirmation, allocation and settlement.Automates exception handling and includes plug-and-play connectivity to post-trade utilities, including Omgeo and SWIFT.

What proprietary EMS functionality is included?ITG provides a seamless integration between Macgregor XIP and ourbroker-neutral Triton EMS, allowing clients to take advantage of Triton’spre- and post-trade analytics, Level II quotes, POSIT crossing, etc. without requiring the user to “stage” or “commit” orders to the EMS.

Does the OMS integrate with any external EMSs?In addition to integration with Triton, Macgregor XIP integrates with a

number of ATSs and EMSs, including: Aqua, BIDS Trading, BLOCKCross,Bloomberg Trade Book, Goldman Sachs REDIPlus, INSTINETNewport/Portal, LAVA, Liquidnet, Morgan Stanley Passport, Neovest,NYFIX Millennium, PIPELINE, Townsend, Trading Screen, UNX. FIX con-nectivity, API, SOA and a variety of Windows programming languagesare used to integrate Macgregor XIP with external systems.

Which version of FIX does the OMS run?FIX 4.0 and FIX 4.2 through use of ITG Net.

For which securities is the system designed?The Macgregor XIP OMS was designed to support all security types,including equities, fixed income, derivatives and currency (hedgingand settlement obligations). Futures and options trading is available.

Which derivatives are supported?Swaps, bank loans and option straddles are included. Can providecustom tickets to match client requirements for various derivativesand can continuously provide targeted derivative functionality thatmatches client’s trading requirements.


How is ongoing support priced?The account is transferred to the support desk, where clients can askabout software functions or troubleshoot a problem (included inlicense fee). Additional services are on a time and material basis.

With which accounting systems does the OMS integrate? Advent Axys, Advent APX, VPM, Citco, IFS, Tradar, State Street andQuasar accounting and admin interfaces.

Is there a remote, or “light,” version of the OMS that can beused for business continuity/disaster recovery?Macgregor XIP supports multiple methods of configuration of theOMS for disaster recovery/business continuity scenarios. Theseinvolve client hardware deployment and network choices so as toenable varying levels of recovery.

For what size and type of firm is the system ideally suited?Hedge funds and traditional asset management firms, ranging from$1 Billion to more than $500 billion in assets under management.

What future enhancements are planned?Further improvements to our integration between Macgregor XIPand Triton, including the ability to split orders directly from Tritonand to apply compliance restrictions from ITG Compliance. Second-generation OMS trade blotter GUI to improve XIP’s trading experi-ence when not used with Triton. Support for thin-client architecture.

Contact Information:[email protected]

Macgregor XIP



LinedataDescription of System:The Linedata Longview order management system provides real-time transparency and insight, helping you quickly see, understandand respond to opportunities. Linedata Longview provides a highlyconfigurable and comprehensive global trading system to supportthe needs of portfolio managers, traders and compliance officers.

What order-management functionality does the system offer?Linedata Longview is a multi-currency, multi-geography and multi-

asset-class solution that can handle swaps, covered bonds, repur-chase agreements and bank debt. Key functionality includes multi-currency, multi-asset-class, multi-site support; seven-level hierarchyportfolio modeling; reporting module; compliance monitoring;highly configurable interface; real-time data integration; advancedrebalancing; rule-based order routing; high-volume execution capabilities; integrated broker FIX connectivity with Linedata LyNX;and fully deployed, ASP or facilities management installations.

(continued on next page)

Linedata Longview


Linedata (cont.)

What proprietary EMS functionality is included?Longview can be deployed with EMS functionality — includingmarket data and full electronic liquidity access to more than 400broker destinations — and with Linedata’s new advanced tradingsolution, Linedata Trader+, which was developed with pure brokerneutrality at its core. The platform enables traders to eliminate multiple trading systems and maximize screen real estate by allowing individuals to choose their necessary tools.

Does the OMS integrate with any external EMSs?Longview integrates with Linedata Trader+ via FIX connectivity, offering a flexible workspace, reliable pre-trade compliance checks,execution management functionality and integrated workflow.

Which version of FIX does the OMS run?We currently support versions 4.0, 4.2, 4.3 and 4.4.For which securities is the system designed?Linedata Longview supports the full range of securities across themajor asset classes: equities, fixed income, mortgages, money mar-kets, foreign exchange, funds, options, futures and swaps.

Which derivatives are supported?Examples of specific derivative types supported by LinedataLongview include but are not limited to futures and options (globally listed and OTC), barriers, spreads, straddles, covered writing, collars, Asian, and Australian.

Does the system handle international securities?Yes. Linedata Longview supports all global and multi-currency securities.

How is ongoing support priced?Software maintenance provides clients with access to support and adedicated, named relationship manager. Additional service offeringsare available and structured to meet the needs of individual clients.

With which accounting systems does the OMS integrate?Linedata is agnostic when it comes to supporting interfaces to

accounting packages because of the ease in creating the appropri-ate file formats. Common systems supported are Linedata’s(Linedata Mfact and Linedata Beauchamp) in addition to solutionsfrom Eagle, SunGard, SEI, Advent, Thomson, CheckFree (ALP andGIM) and Princeton. All interfaces to accounting packages can berun in a batch, intra-day or real time. Linedata can supply a morecomprehensive list if needed.

Is there a remote, or “light,” version of the OMS that can beused for business continuity/disaster recovery?Fully deployed, ASP or facilities management installations.

For what size and type of firm is the system ideally suited?One half of our clients represent the largest institutional asset man-agement firms in the world, including 10 of the top 25 asset man-agement firms as measured by AUM and some of the most activelytrading firms in the world. Linedata has a growing client base inmid-size asset management firms and hedge funds through ourASP environment. Linedata Longview also is present in a significantnumber of large wealth managers, including firms with in excess of100,000 accounts and 300-plus concurrent users on a single data-base instance. Linedata has experience supporting the followingtypes of firms: in-house discretionary/non-discretionary, SMA, WRAP,private wealth, institutional, hedge funds and mutual funds.

What future enhancements are planned?Future enhancements include added security coverage, audit, workflow and user interface, increased throughput, expanded portfolio management capabilities, and preparation for growth,scalability and support for Linedata’s ASP and service businesses.

Contact Information:Linedata Salesgetinfo@linedata,com617-912-4700www.linedata.com

Linedata Longview

SGGG Porfolio SystemsDescription of System:The system provides powerful tools for the full fund management process.

What order-management functionality does the system offer?The system provides tools for order management, compliance, settlement and reconciliation. It supports multiple portfolios, strategies, asset types, currencies and prime brokers.

What proprietary EMS functionality is included?The system is capable of receiving and processing two-way FIXmessages from any FIX-capable EMS. The SGGG Portfolio System is broker-neutral.

Does the OMS integrate with any external EMSs?How is it integrated?The SGGG Portfolio System has integrated via FIX connectivity withall of the broker-sponsored EMS platforms and is in productionenvironments with all of the major EMSs.

Which version of FIX does the OMS run?FIX 4.2.

For which securities is the system designed?All asset classes are supported: U.S. and international equities, listedand OTC equity options, fixed income, foreign exchange, futures andcomplex derivatives.

Which derivatives are supported?Both OTC and listed derivatives are supported, including forwards,futures, options, swaps, fixed income and credit products.

Does the system handle international securities?The system handles securities from all major global markets.

How is ongoing support priced?All support is included in the monthly licensing fee. There are noadditional fees for implementation, upgrades or any ongoing maintenance and support.

With which accounting systems does the OMS integrate?N/A

Is there a remote, or “light,” version of the OMS that can beused for business continuity/disaster recovery?N/A

For what size and type of firm is the system ideally suited?The OMS capabilities are great for small and mid-size hedge funds.

What future enhancements are planned?N/A

Contact Information:Dan [email protected]


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o paraphrase (poorly) Winston Churchill,our equity markets are the worst form ofmarket structure “except all the others thathave been tried.” Our current market struc-ture is competitive, fast, innovative andcheap — all to a fault. The problem is, each

market participant has different demands and tradingstrategies, making it difficult to solve market structurechallenges; helping one constituency tends to hurt another.

The market can be segmented into five major con-stituencies: issuers, investors (retail and institutional),brokers, liquidity providers (market makers, high-fre-quency traders and day traders), and market centers(exchanges, ATSs, ECNs, MTFs, SEFs and organized tradefacilities). Each of these constituents has differentdemands and concerns. If regulations favor any con-stituent to the detriment of others, the market can bethrown out of balance, not only impacting trading vol-umes but also the allocation of capital to corporations,which translates to jobs.

A Retail BoomStructurally, the market has never been better for retailinvestors. While the majority of retail orders is internalizedby wholesalers, spreads are tight, transaction costs arelow, technology is extensive and, for small orders, liquidityis abundant. Retail internalization typically is not a prob-lem for retail investors; it is challenging for institutionsand liquidity providers. Confidence is the problem forretail investors. Post-financial crisis and post-Flash Crash,the individual has little market confidence and evenbelieves the game is rigged.

Institutional investors have more confidence, but theyalso have greater demands. They need liquidity, have ahard time trading blocks, and believe exchange flow istoxic because most desirable flow is internalized or tradedin the dark. Since buy-side firms can’t trade blocks, theyhave an over-reliance on broker technology, algorithmsand dark pools. This becomes a self-fulfilling prophecy:As blocks disappear, traders employ dark pools and algos,which reduces block executions and forces flow intoalgos and dark pools. Speed also is a disadvantage forthe buy side, as market makers and liquidity providersleverage colocation, putting the buy-side trader micro- tomilliseconds behind the fastest liquidity providers.

Brokers managing buy-side flow increasingly need toinvest heavily in technology. The development of tradingalgorithms, dark pools, smart order routing and market

connectivity isn’t cheap. In addition, competition isfierce and commissions are being driven downward.For brokers, reducing exchange payments puts moneydirectly back in their pockets; negotiating the fragment-ed market environment, however, is problematic, as issupporting the various buy-side players with a widearray of tools and services.

The current market structure generally benefits liquid-ity providers — not because the SEC drafted beneficialregulation, but because the more modern liquidityproviders crafted their business models based on the newrules. While the current structure benefits these players,competition, low volatility, decreasing order flow, andthe growth in internalization and dark pools have reducedthe flow with which this demographic interacts. Lowerretail trading volumes also hurt internalizers, many ofwhich are liquidity providers as well.

While the structure benefits newer liquidity providers,older market markers, specialists and day traders havefound it challenging. The fragmented market coupled withthe technology investment, sheer analytical capability and

pure speed needed to compete have all but knocked small-er and less-automated players out of the market.

Market centers that have invested in speed-enabledinfrastructures also have benefited from the newer regu-lations. While old-line exchanges have had to invest intechnology to maintain market share, exchanges also arefinding a vibrant business in providing market technolo-gies. The largest challenge to exchanges is internalizationand dark trading. The more shares that are internalizedor traded via ATSs, ECNs, MTFs and OTFs, the fewerthere are to match on the exchange. With more than one-third of the U.S. market now being traded off-exchange,this is a central topic not only for exchanges but for mostmarket participants as well.

With virtually every segment complaining about somemarket structure challenge, the questions is: How do youfix this mess and keep the various market entities in bal-ance? Or are some entities (such as issuers and investors)more important than others? ■


By Larry TabbFounder and CEO ofWestborough, Mass.-based TABB Group, a financial markets strategic advisory firm. [email protected]

How do you fix this messand keep the various marketentities in balance?

street cred

TThe Worst Market Ever

have met many innovators over the courseof my career reporting on financial technol-ogy and electronic trading, enough to knowthat the real force behind Wall Street is thepeople, not the machines. Today’s era of high-frequency trading, complex derivatives and

electronic exchanges didn’t just arrive overnight. It’staken decades of work by innovators in finance andtechnology — people who blazed a trail in marketdata distribution, middle- and back-office operations,options pricing models, portfolio construction, baskettrading, matching engines, and more.

So what are the characteristics of innovators? Iasked my husband, who is an engineer and whosefather was an inventor, of sorts. (In the 1970s, heinvented a phone meter that allowed consumersto measure the cost of routing a call through thenearest central office.) While my father-in-law’singenuity never resulted in a big payday, henonetheless turned his family’s house into a factoryand enlisted his four children to work for him. One

time he even took apart the family television set,refusing to call a repairman, but lost interest andnever put it back together again.

Shaped by that experience and traumatized byseveral engineer bosses who fancied themselvesas pioneers, my husband tells me, “Innovators tendto be eccentric and obsessed with their ideas. Theyalso tend to be ahead of their times, and they canalso be socially inept. But they have charisma andattract a cult following.”

Steve Jobs offers a perfect example. Though hewas forced out of Apple, the company he founded,in 1985, he kept at it, founding NeXT, which builtthe NeXT Computer workstation that madeinroads on the Street in the 1990s. Jobs sold theNeXT workstation to Wall Street firms such asO’Connor & Associates.

In 1989, Chicago-based O’Connor & Associates,a proprietary options trading firm, formed a jointventure with Swiss Bank Corp., SBC/OC Services.

The joint venture was designing OTC derivativeswith NeXT workstations to speed up applicationdevelopment. Craig Heimark, a managing partnerof the O’Connor Group and head of the SBC/OCventure, told me at the time, “It’s better to take riskswith technology than [with] your balance sheet.”

Despite Jobs’ reputation as an innovator, how-ever, NeXT had a hard time gaining critical mass inthe capital markets, where Sun Microsystems dom-inated. But that didn’t matter to Jobs. He ended upgoing back to Apple to rescue the company andintroduce to the world the iPod, iPhone and mostrecently, the iPad tablet.

Paving the Way on the StreetIn the same way that Jobs set the standard for digitalconsumer media, there have been key innovatorson Wall Street who laid the groundwork for themodern financial industry and influenced genera-tions of traders to come. I often think of LeoMelamed, the former CME chairman emeritus whowas the architect of Globex, the CME’s electronictrading platform, in the late 1980s. Melamed, whowrites science fiction in his spare time, envisionedthe future — and he saw the global growth offutures exchanges. Like many innovations, Globexhad a rocky start and faced resistance from tradersin the pits, but eventually Melamed’s vision was val-idated and the CME went electronic.

Steve Wunsch also comes to mind. Before theterm “dark pool” was even muttered, Wunsch, a for-mer VP at Kidder Peabody, teamed up with com-puter scientists from Cray Research to develop anauction system for stocks that completely bypassedbrokers and exchanges. Institutional investorswould enter their orders and stipulate the pricesthey would accept. Then three times a week, thecomputer would sort through the orders and findthe equilibrium price. While computerized marketssuch as Jefferies Posit (before it was sold to ITG)and the Instinet Crossing Network already existed,they used the prices from the exchanges, whereasWunsch’s system set its own prices by matchinginstitutional buyers and sellers.

At the time, observers noted that Wunsch wastesting the limits of Wall Street. Clearly, that trait —the desire to disrupt the status quo — is anothercharacteristic of innovators. ■

Innovators tend to beobsessed with their ideas.


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

and Advanced Trading. [email protected]

The Stuff of Legend

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“ Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking af� liates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking af� liates of Bank of America Corporation (“Investment Banking Af� liates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer and member of FINRA and SIPC, and, in other jurisdictions, locally registered entities. Investment products offered by Investment Banking Af� liates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed. ©2011 Bank of America Corporation.

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