AT TOC (Page 1)

INTELLIGENCE FOR THE ELECTRONIC MARKETS JUNE 2011

BRIAN NIGITO & SETH MERRIN DAVE CUMMINGS DAVID LEINWEBER CHRIS ROGERS

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

LARRY FINK BILL PORTER WHO HAD THE BIGGEST IMPACT ON THE BUY SIDE IN THE PAST DECADE? HERE ARE 10 INNOVATORS WHOSE ACHIEVEMENTS PROPELLED THE TRADING DESK INTO THE 21ST CENTURY. P.13

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June 2011

14 Seth Merrin Imagining Wholesale Change 15 Dave Cummings Market Maker 15 David Leinweber 14 15 15 16 17 Breaking News 16 Brian Nigito and Chris Rogers A Perfect Match 17 Barney Frank The Man Behind the Law 18 Richard Korhammer 18 19 20 20 21 Setting Information Free 19 Dan Mathisson Big Idea In Small Orders Making History 20 David E. Shaw 13 On the Street Quantitative Thinker 20 Larry Fink The past decade saw a complete upheaval on A Pioneer of Modern Finance the trading desk and a surge forward in the way 21 Bill Porter traders do their jobs. We now work at greater A World of Options speeds and with greater efficiency than at any PLUS: other time in history. Advanced Trading presents 22 Protecting Your IP the innovators who helped make it possible. Financial services firms are built on innovation. Protecting those advantages is a full-time job.

ADVANCED TRADING • www.advancedtrading.com • June 2011 3 contents advancedtrading.com videos slideshows white papers news opinions

9 MARKET INTELLIGENCE Hedge Fund Managers Predict A Strong Year 2011 will see an increase in new fund launches, a slowing of redemptions and fewer fund closings, according to a survey of hedge fund managers.

10 ANATOMY OF A TRADING FLOOR Direct Access Partners Institutional agency-only brokerage DAP focuses on multi-asset-class executions in both domestic and SEC REGISTRATION SURVIVAL GUIDE international securities. Take an After years of operating in the shadows, hedge funds are about to be exclusive look inside the firm’s thrust into the light. Under Dodd-Frank, most hedge funds have to new Manhattan trading floor. regiter with the SEC by July 2011. To help you survive life under the SEC, we present the SEC Registration Survival Guide — everything 26 TRADING TECH DIRECTORY OMS Providers The trading desk you need to know about the registration process and complying with moves at a faster pace than ever the SEC’s rules. advancedtrading.com/digital-edition/may2011 before, and the right order management system can be the difference between execution and missed opportunity. Our exclusive DODD-FRANK CHEAT SHEET directory details some of the top Compliance Help At nearly 1,000 pages long, the Dodd-Frank Wall Street Reform OMS providers and their platforms. and 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 33 STREET CRED it’s free. advancedtrading.com/dodd-frank The Worst Form of Market Structure? Contributing editor TRADING FLOOR PHOTOS Larry Tabb may not be Winston Nomura Securities “Our first priority was to build out our systems and architecture, Churchill, but he recognizes a mostly from scratch,” senior managing director Ciaran O’Kelly reports of Nomura’s conundrum when he sees one: push to expand its U.S. equities trading operation. Check out exclusive photos of The markets are better than ever; Nomura’s new Wall Street trading floor. advancedtrading.com/photos/nomura so how do you fix them? VIDEO 34 AT THE CLOSE Is High-Frequency Trading Hitting a Wall? As trading gets faster and faster, the Wall Street Legends The real secret technology barriers get higher and higher. According to Larry Tabb, only the biggest sauce on the Street is the creative firms can compete in the HFT space. Unless the small guys can find a niche, he adds, people whose innovations paved they’ll have to get out of the game. advancedtrading.com/tabb-on-hft the way for modern trading, not the technology, says editor-at- TRADING TECH DIRECTORY large Ivy Schmerken. Dark Algorithm Providers Don’t be afraid of the dark. Advanced Trading’s directory of dark algorithm providers can help you find the tools you need to source liquidity in 6 EDITOR’S LETTER the opaque markets. advancedtrading.com/directory/dark-algos

Reader Advisory Board

Floyd Coleman Michel Debiche Peter Driscoll Bryan Kievit Tim Olsen Rob Shapiro Joan Stack Jason Valdez U.S. Head Trader President and CEO Vice President, Head Trader Senior Vice President/ Executive Director Trading Manager Head of Global AXA Rosenberg Quantia Capital Senior Equity Trader Accipiter Capital Head Trader Morgan Stanley Ohio Public Employees Equity Trading Management Northern Trust Management ICM Asset Management Investment Management Retirement System Penserra Securities

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AGENCY JOB NO.: CDW.CDWFST.11035.K.011 DATE/TIME: 5-9-2011 11:28 AM BLEED: 8.875” w x 11.375” h DIVISION/OFFICE: Ogilvy/Chicago OPERATOR: Peter.Schafer TRIM: 7.75” w x 10” h STUDIO JOB NO.: None LIVE: 6.75” w x 9” h VERSION: Base SLUG FONTS: DIN Light, DIN Regular DUPLEX: No REVISION: FINAL SCALE: 1”:1” NO. OF PAGES: 1 of 1 FONTS: Prelo (Black, Book) PRINTED AT: None FILENAME: 94466_CDWFST11035K011_ IMAGES: 11.02.24-CDW-94133_v8_hr.tif RESOLUTION PLACED: HiRes SML_Q2_Networking_ (360 ppi; CMYK), 94466_CDW_ Securities_1Partn_Ad_HP_F.indd PWGI_CMYK.eps, 94466_HP_ EXEC. CREATIVE DIRECTOR: None Dimensional_Blue.eps CREATIVE DIRECTOR: N. Vaznonis AD TITLE: 94466 SMLQ2 Networking Securi- COLOR PROFILES: None ART DIRECTOR: M. Gore ties 1Partn Ad-HP TRAPS: None COPYWRITER: M. Peabody CLIENT: CDW DIE CUT: None ACCOUNT: J. Wisnieski CLIENT JOB NO.: CDW 94466 COLOR SWATCHES: Cyan PRINT PRODUCER: A. Kubala BRAND: CDW Magenta TRAFFIC: A. Martinez PRODUCT: Ad Yellow ART BUYER: K. Murphy CODENAME: None Black ENGRAVER: Superior Digital Graphics JOB TYPE: Print JOB CATEGORY: CDW Mechanicals TO APPEAR IN: 6/1 Advanced Trading 8.875” x 11.375” 7.75” x 10” 6.75” x 9” editor’s letter

Volume 7, No. 3 VP/GROUP PUBLISHER John Ecke 212.600.3097 [email protected] EDITORIAL Editor-in-Chief Phil Albinus [email protected] Group Content Manager Les Kovach [email protected] Back In My Day … Editor-at-Large Ivy Schmerken [email protected] Associate Editor Justin Grant [email protected] Associate Managing Editor Nathan Conz [email protected] Contributing Editor Larry Tabb [email protected] omehow I’ve become the old guy in the office. At ART Kristen Terrana, Igor Jovicic, Tony Vecchione the wizened age of 46 I can tell stories about life BigYellowTaxi.com before email, when you had to pick up documents ADVERTISING SALES OFFICE 240 WEST 35TH ST., 8TH FLOOR at the fax machine and when only doctors and drug NEW YORK, NY 10001 dealers carried pagers (forget smartphones). National Sales Director Ben Riggle 212.600.3171 [email protected] Northeast Robyn Forma 212.600.3118 [email protected] West Coast Leilani Provost 415.947.6146 [email protected] SAt one job, the HR rep told me excitedly that I would have my very own Southeast and Midwest James Lloyd 212.600.3375 [email protected] AOL account. Just weeks before I started working there, I was told, the PRODUCTION office had to share a single account. Coworkers would place a flag attached Account Coordinator Amanda Waller [email protected] to a paperweight next to their Gateway PCs so that everyone would know Publishing Services Manager Ruth Duggan [email protected] AUDIENCE DEVELOPMENT who was using the account; if you needed to check your “electronic mail,” Assistant Manager Adrienne Farquharson [email protected] you could ask that person to sign off and hand over the flag. If it sounds a For article reprints and e-prints, please contact: Wright’s Media little like “Little House on the Prairie,” it was. Brian Kolb 877.652.5295 [email protected] When 20-somethings complain about Windows 7 crashing once a week, List Rental: MeritDirect Anthony Carraturo 914.368.1083 [email protected] I think back to Windows for Workgroups 3.11. Those were the days. One INFORMATIONWEEK FINANCIAL SERVICES designer would foresee a crash coming and yell “Save!” to the entire mag- UBM TechWeb CEO Tony L. Uphoff [email protected] azine staff so everyone would store all of their work in progress before VP & Group Publisher John Ecke [email protected] EVP, Sales, InformationWeek Business Technology Network Martha Schwartz the server went down. And we all ooh’d and aah’d when we were informed [email protected] that the server now had an awesome new amount of Editorial Director Greg MacSweeney [email protected] Group Content Manager Les Kovach [email protected] storage for our files: a whole gigabyte! Today we have National Sales Director Ben Riggle [email protected] 8 GB on our iPhones (and it still isn’t enough for all Webmaster Vitali Zhulkovsky [email protected] Senior Director, Events Robyn Duda [email protected] of our music and photos). Event Director Jennifer Iannucci [email protected] Looking back, the 1990s were a remarkable time. Senior Event Manager Mitzi Trafton [email protected] Senior Event Manager Joseph Marks [email protected] We had a federal surplus, a thriving entrepreneurial Director, Program Management, Vertical Markets Michelle Somers [email protected] culture and record-low unemployment. (If you didn’t Business Manager Joe Donnelly [email protected] have a job from 1995 to 2001, it was probably your UBM TECHWEB fault.) During this decade, operating systems became CEO Tony L. Uphoff more stable, chips gained power and speed, and net- Chief Content Officer and Editor-in-Chief, TechWeb.com David Berlind works became more robust and widespread. Sure, the Chief Information Officer David Michael Chief Financial Officer John Dennehy innovations did take some getting used to — back then, few people felt com- Chief Marketing Officer Scott Vaughan fortable typing in their credit card numbers and hitting “send,” for example. EVP, InformationWeek Business Technology Network Ed Grossman EVP, Sales, InformationWeek Business Technology Network Martha Schwartz Now, however, thanks to the innovations of the 1990s, we live in a faster, EVP, Group General Manager, UBM TechWeb Events Network Lenny Heymann EVP, Sales, UBM TechWeb Events Network Marco Pardi more convenient (if frustrating) world. We work at greater speeds and process EVP, UBM TechWeb Light Reading Communications Group Joseph Braue more information than at any other time in history. And the trading desk EVP, UBM TechWeb Game Network Simon Carless SVP, People and Culture Beth Rivera resembles a NASA control center rather than the exchange floors of the past. VP, Editorial Director, InformationWeek In this special issue of Advanced Trading, we take a look at the people Business Technology Network Fritz Nelson VP, Audience Marketing Dan Melore whose ideas and systems are used by today’s traders and broker-dealers VP/Group Publisher, Vertical Industries John Ecke VP, Performance Marketing and Analytics Thomas Smith to navigate the markets. From the advent of machine-readable news to the VP, InformationWeek Analytics Art Wittman introduction of new alternative trading systems to the launch of a comput- UNITED BUSINESS MEDIA LLC er-based hedge fund strategy, the innovations put forth by our group of SVP, Strategic Development and Business Administration Pat Nohilly SVP, Manufacturing Marie Myers pioneers forever changed the direction of the Street. So where does innovation originate? It comes from problem solving and opportunity and the desire to make more money than the next guy. Even an old editor like me knows that.

Phil Albinus, Editor-in-Chief @PhilAlbinus

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Despite the precarious economic recovery and intensifying regulatory scrutiny, managers expect an increase in new hedge fund launches, a slowing of redemptions and fewer fund closings in 2011. By Justin Grant Hedge Fund Managers Predict a Strong Year

appy days evidently are here magnified by the crisis, many have recently announced again for hedge funds, even as increased allocations to non-traditional investments, including the fragile global economic hedge funds and private equity funds.” Because hedge funds are growing increasingly reliant on recovery plods along and the institutional capital, the survey found, an overwhelming major- specter of increased regulatory ity have become less willing to make leveraged bets. scrutiny looms over the industry. According to the report, nearly 78 percent of hedge fund man- A clear majority of hedge fund agers are using leverage significantly less in their investments managers predict that 2011 will be a now than they did before the 2008 crisis. strong year for new launches, slower “As institutional capital has become more influential, the redemptions and fewer closures, according to a survey con- hedge fund industry has generally scaled back leveraged Hducted by the accounting and audit firm Rothstein Kass. The investing further,” Kelly Easterling, a principal in Rothstein research also found that as hedge funds become more institu- Kass’ Walnut Creek, Calif., office, wrote in the report. tional in nature, many are looking to beef up their management To illustrate the growing influence of institutional capital on teams, with a growing number of firms placing a larger empha- hedge funds, the research points out that in 2007, only 20 percent sis on operations, compliance and technology. of managers expected institutional investors to be the dominant In a survey of 313 hedge fund managers conducted in source of capital for the industry. Three years later that figure January, Rothstein Kass found that nearly 75 percent expect soared dramatically, with 70 percent of managers now predicting there to be more fund launches in 2011 than last year. Further, institutional funds will be the key source of capital for hedge funds. nearly 63 percent of participants predicted fewer hedge funds But as those institutional clients invest big money in hedge will close, and 80 percent said the pace of redemptions will funds, they’re demanding that their money managers tighten slow down this year. According to Rothstein Kass, 70 percent their operational structure. According to the survey, 92 percent of the funds surveyed manage less than $500 million. of fund managers are focusing more closely on due diligence in 2011 to appease regulators and investors. Compliance Provides a Confidence Boost “Everything — including organizational structure, reporting Meanwhile, an increased emphasis on compliance — which process, technology and service provider relationships — is a began across the hedge fund industry prior to the passage of factor in capital-raising efforts,” Jeff Kollin, head of Rothstein the Dodd-Frank Act in mid-2010 — has been a boon for investor Kass’ financial services advisory unit, added in the report. “This confidence, the research found. As a result, hedge funds will is consistent with our advice to clients to act institutional.” ■ see a wave of new investments from institutional clients such as pension funds, endowments and sovereign wealth funds throughout 2011 and beyond, Rothstein Kass reported. “The hedge fund industry has dynamically benefitted from the market recovery,” Rothstein Kass co-chief executive Howard Altman wrote in the firm’s report. “With pension plans working to overcome significant funding shortfalls

ADVANCED TRADING • www.advancedtrading.com • June 2011 9 anatomy of a trading floor

Reported by Ivy Schmerken

Featuring: Direct Access Partners ounded in 2002 as a floor broker, Direct Access Partners opened a new trading floor in lower Manhattan in May 2010. With 54 workstations, the New York floor houses eight traders focusing on multi-asset-class executions in Fequities, fixed income and options, including both domestic and international securities. The institutional agency-only brokerage also runs a floor brokerage operation on the New York Stock Exchange with a dozen or so traders in one of the NYSE’s new trading pods. In addition, DAP, which acquired the U.S. equity trading team of Kellogg Partners in January 2011, has eight Ben Chinea, CEO and Founder (above): “We want the financial traders in Miami who cater to international services community to know we’re a source of alternative capital,” says Chinea. “Whether your’e a start-up fund, emerging manager clients and five traders in its Boston office or an established fund, we have a solution with capital, technology, servicing mutual fund clients in the region. clearance and execution.”

10 June 2011 • www.advancedtrading.com • ADVANCED TRADING Photography by Stephen Aviano DAP executes multi-asset trades in 115 global markets through relationships with brokers on the ground in local markets. It also has a growing multi- prime brokerage business that it clears through Goldman Sachs, Bank of America Merrill Lynch and Pershing/BNY Mellon. “Last year, we were one of six brokers that were approved to introduce prime to Goldman Sachs, “ notes CEO Chinea.

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 calling for the trader’s input and feedback,” he says. “It’s not about a high-frequency strategy.” Clients typically are investment managers looking for market color and sentiment. “It’s more about the analysis of data and market intelligence,” Chinea adds.

Mike Shea, Managing Partner, Institutional Sales and Trading (left), focuses on domestic equities. Shea says he uses the Fidessa OMS/EMS platform (second screen from right) for monitoring Level II data and for accessing a full suite of algorithms and dark pool aggregators. He uses Bloomberg LaunchPad (far left screen) for data and charts, and Bloomberg Chat (second monitor from left) to communicate with clients, though Shea says he also has clients who prefer AIM — AOL’s instant messenger. DAP uses a highly customized version of Salesforce.com (far right screen) for tracking account coverage. William Reekstin, Managing Director, Global Equities (left), relies on Fidessa in addition to a variety of EMSs, including Goldman’s RediPlus (top left screen), BofA Merrill Lynch’s InstaQuote (far left, bottom) and TradingScreen (top right). “We aggregate business from different parts of the world,” says Reekstin, whose buy- and sell-side clients are based in Latin America, Europe and Asia.

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

advancedtrading.com For dozens of additional photos of Direct Access Partners’ New York trading floor, visit: advancedtrading.com/photos/DAP.

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t was seismic, but at the time, it was almost too easy to miss. Ten years ago the financial markets moved from paper-based processes that were rife with errors to electronic platforms that opened the gates for faster transaction rates and exploding trade volumes. Appropriately, if you blinked, you missed the transformation. IThe groundwork for the electronic revolution class that experts previously thought could be in the capital markets was set in the 1990s, when traded only on the floor of an exchange with a personal computers debuted, microprocessors handshake between broker and trader. The rest, doubled in speed, networks expanded and oper- they say, is history (see page 21 for details). ating systems stopped crashing every 18 minutes. Of course, there are plenty of people Advanced Then along came Advanced Trading’s Top 10 Trading could have profiled who we passed over, Innovators of the Decade, who each played a such as Steve Jobs and Mark Zuckerberg, the undis- big part in Wall Street’s renaissance, if you will. puted innovators who ushered in the new age of (It’s easy to forget that as little as 15 years ago the mobile computing and social media. And some of floors of the exchanges were still littered with our choices — including Rep. Barney Frank, the paper and the most cutting-edge machine for Massachusetts Democrat whose name is on the most settling trades was the fax machine.) sweeping financial reform law in half a century — In devising this list, AT’s editors, together with may raise some eyebrows. (What did Frank innovate, the editors of Wall Street & Technology, chose the you ask? Talk to the folks who are advising you about individuals who had the biggest impact on the way registering your hedge fund with the SEC.) traders and brokers do their jobs. We looked at As always, we welcome your comments. Did we people who created true before and after moments, miss any innovators from the past 10 years who people whose innovations unleashed the power of deserved recognition on our list? Did we give someone electronic markets. Bill Porter and the other too much credit? Drop us a line and say your peace. creators of the International Securities Exchange, Until then, enjoy reading about the accomplishments for example, saw an opportunity to introduce elec- of our Top 10 Innovators of the Decade. The tronic trading to the world of options, an asset changes they inspired are the stuff of history. ■

ADVANCED TRADING • www.advancedtrading.com • June 2011 13 Against the odds, Liquidnet founder Seth Merrin created an institutional marketplace for block trading where others had failed. By Ivy Schmerken Imagining Wholesale Change

hen Seth Merrin pitched an idea in 1999 for a wholesale electronic marketplace where institutional investors could trade large blocks of stocks, he was out to solve a problem: While the Internet had revolutionized retail trading during the dot-com era, “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. WMerrin’s idea was to enable the buy side to find the natural ing the buy side access to 39 equity markets on five continents. contra, or the other side of the trade, without involving the Merrin describes his innovation as “creating marketplaces broker as intermediary. But he was not the first to look to solve that enable institutions to trade in size with the efficiency that the problem this way; there were other attempts in the 1990s. they sorely need.” In the U.S., Liquidnet’s average execution Optimark flamed out after spending $400 million, the size of 50,000 shares is 200 times the size of the 250-share average Arizona Stock Exchange was equally unsuccessful, and traded in all lit and dark venues; Liquidnet’s average execution attempts by Fidelity and Morgan Stanley also failed, according in international equities is 100 times larger than the average. to Merrin, an ex-arbitrage trader who invented the order management system in the 1980s, paving the way for electronic The Innovations Keep on Flowing trading. “None of them could figure out how to create a critical Merrin’s next big innovation, in September 2005, was launching mass of buy-side liquidity in a short enough time,” he says. H20, a service that brings in retail-size flow — from DMA aggre- Merrin acknowledges that the obstacles were massive. First, gators, agency brokers, exchanges and ECNs — against which the idea hinged on getting institutions to share their order institutions can match part of their orders in real time while flow. “We went to the buy side and we said, ‘Give me all of continuing to wait for a block match in the negotiated pool. your orders.’ Nobody had ever asked for that,” Merrin recalls. Analysts praised the strategy as a way for Liquidnet to tap Next, Merrin needed to convince providers to add his mar- into sell-side liquidity to increase its match rates, while main- ketplace to their OMSs. To pressure them, he formed an taining its closed institutional system. “The real innovation advisory group — of each of their largest buy-side customers. here is to bring institutional liquidity and broker liquidity into As he drew up his business plan, Merrin calculated that he the institutional marketplace,” according to Merrin, who says needed 100 buy-side firms live on Liquidnet on Day One to cre- H20 is a continuation of Liquidnet’s strategy. ate critical mass. As launch day grew closer, he revised that “The last place that institutions want to execute is ‘out number down to 75, ultimately launching in April 2001 with there.’ Every order that an institution sends to the public just 38 institutions. But in the 10 years since, Liquidnet’s mem- marketplace sends out signals that the high-frequency traders bership has skyrocketed to more than 630 asset management take advantage of,” Merrin asserts. firms around the world, representing total assets of more than But Liquidnet continues to face competition from agency $12.5 trillion. And the firm has expanded across the globe, offer- brokers — the likes of ITG, Instinet, Pipeline and Pulse Tradng’s BlockCross. And the blotter-scraping technology pioneered by Liquidnet is now the subject of patent infringement lawsuits among three of these players. But none of Liquidnet’s competitors focus exclusively on the buy side — Liquidnet’s No. 1 distinguishing feature. Meanwhile, Merrin is onto his next big idea — bringing the corporate market into the wholesale marketplace. As part of its global expansion, Liquidnet is partnering with international exchanges that use its dark pool technology to help them create a wholesale market that also provides Liquidnet’s members with access to more liquidity. “Our job over the next decade is to make the world a smaller, more efficient place to invest,” says Merrin. And he sounds determined to make it happen. ■

14 June 2011 • www.advancedtrading.com • ADVANCED TRADING Where others saw trouble, Dave Cummings saw opportunity. His vision for an ECN spawned BATS and reshaped the trading landscape. By Justin Grant Market Maker

ix years ago, after Nasdaq and the NYSE gobbled up trading platform. Under Cummings’ watch, the firm filled its cof- Instinet and Archipelago, Tradebot Systems founder fers by offering broker-dealers rebates in exchange for liquidity, Dave Cummings saw an opportunity. While those behe- a tactic Direct Edge, another alternative exchange, has since moths set about consolidating the market and raising leveraged to rise to prominence. And at year’s end, BATS — short prices, Cummings started a relatively obscure electronic for Better Alternative Trading System — plans to list public U.S. Scommunication network that would become BATS Global shares, giving companies their first chance in years to sell equity Markets, a growing force in the exchange space. domestically on a platform outside the traditional exchanges. But Cummings hesitates to classify his idea as an innovation. Although Cummings resigned from BATS in 2007 as it pre- “The initial notion was obvious — we just needed pared to become an exchange, he says the compa- to replace Instinet,” he says. “Then, after we had ny’s unique customer-oriented approach enabled it it up and running for six months or a year, there to become a worthy rival to NYSE and Nasdaq. “The was a notion that we could go even further than whole justification for the original mergers was to we did. There was a gaping hole to be played eliminate competition so they could raise prices,” because the industry over-consolidated.” says Cummings, who returned as chairman to auto- Cummings parlayed his vision into a global firm mated trading firm Tradebot after leaving BATS. that’s now home to the third-largest U.S. securities “As a customer, we don’t like that. We made a com- market and Europe’s second-biggest alternative petitive playing field by restoring competition.” ■

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

ell most people that they’re being profiled as an titative global equity portfolios. Then, Innovator of the Decade and they will thank you. in the late ’90s, he and an officemate David Leinweber asks playfully, “For which achieve- got the bug to start Codexa, an ment?” It’s not bragging if it’s true. Internet-based information collating, Currently head of the Caltech Center for Innovative aggregation and filtering service. TFinancial Technology, Leinweber has played a significant role Instead of reading the Wall Street Journal or squinting at in the development of algo and high-frequency trading. In fact, breaking news on CNBC, Leinweber’s service allowed financial he’s been around electronic trading for so long that he remem- news to be reduced to digital elements, metatagged and fed into bers when HFT was called “second (and then half-second) trad- investment firms’ trading models, enabling computers to identify ing.” But thanks largely to Leinweber’s innovations in the field trading opportunities in a fraction of the time it would take of machine-readable news, in particular, high-frequency strate- human traders to act. “You need new news ... to reach alpha,” gies today can trade on breaking developments in milliseconds. Leinweber explains. “You need a measure of novelty, importance The evolution of Leinweber’s idea, however, took a little longer. — such as new management, credit ratings, downgrades, etc.” In the early 1980s Leinweber oversaw real-time applications of While today Wall Street black boxes depend on machine- artificial intelligence at the RAND Corporation. This work led readable news, Leinweber acknowledges that he faced skep- him to form in 1987 Integrated Analytics, which unveiled ticism at first. “In the 1970s, people said computers would QuantEx, a revolutionary e-trading platform. After Integrated not be able to play a decent game of chess,” he recalls. “In Analytics was acquired by ITG in 1990, Leinweber moved to 1997, IBM’s Deep Blue played Garry Kasparov. And now, First Quadrant, where he oversaw $6 billion in institutional quan- Watson is on Jeopardy.” ■

ADVANCED TRADING • www.advancedtrading.com • June 2011 15 Together, Brian Nigito and Chris Rogers have rewritten the electronic trading landscape. By Ivy Schmerken A Perfect Match

ou could say ex-college roomates Brian Nigito and Chris Rogers are something of a dynamic duo. Together, Nigito, who recently left high-frequency trading firm Getco, and Rogers, currently CTO at Instinet, have driven electronic trading to new 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. YBefore the two innovators collaborated on any code, on his own; Rogers moved on to a consulting gig at they shared a dorm room at the Stephens Institute of Manhattan Beach Trading, and by 2004 Nigito left to serve Technology in Hoboken, N.J. After graduation, they as director of high-frequency trading at Citadel Investment worked together at Internet start-up Mail.com. When the Group in Chicago. But the pair would reunite in 2005. dot-com bubble burst, they looked for work on Wall Street. When Reuters sold Instinet, sending the INET ECN to Both Nigito and Rogers ended up at Tradescape, a day- Nasdaq and the institutional brokerage business ultimately trading firm that had an afterhours trading platform called to SilverLake Partners, the team was called on again. Under MarketXT, which they promptly integrated into Nasdaq its non-compete clause with Nasdaq, SilverLake/Instinet could as a small order execution system (SOES) participant. not operate CBX as an ECN in the U.S.; but no one said any- “We were the only SuperSOES ECN,” notes Rogers. thing about international trading or dark pools, Nigito recalls. Their work attracted the attention of Island, and Nigito In short order, he and Rogers rewrote the CBX matching and Rogers joined the firm within a week or so of each other. engine along with Instinet’s entire software infrastructure. In 2002, shortly after Island was acquired by rival Instinet, “That became the basis for Chi-X Europe,” Nigito notes. which was owned by Reuters, Nigito and Rogers were Today, the technology that Rogers and Nigito developed charged with rewriting Island ECN founder Josh Levine’s for Instinet not only is the basis of Chi-X Europe, which matching engine from DOS into Java. The result was INET. has captured close to 30 percent of the FTSE 100 volume Initially, Instinet moved its ECN business onto INET and and 17 percent of volume in pan-European stocks, but set up a dark pool, rebranded as Continuous Block Crossing, also Chi-X Canada, Chi-X Japan and Chi-East. And Instinet, or CBX, on Instinet’s legacy platfrom for its broker-dealer which was acquired by Nomura in 2007, continues to use business. “The Island system [INET] was much more effi- Nigito’s and Rogers’ technology for all of its dark pools cient in terms of machine utilization but was very simple, globally, including its new options dark pool, OptionsCBX. while the Instinet system was feature-rich,” says Nigito. As a result, according to Nigito, he and Rogers created It Takes Two a hybrid that “used the heart” of Island’s INET matching Nigito is quick to point out that he and Rogers couldn’t engine but had the look and feel of the old Instinet text- have achieved so much individually. “While I was able based terminal “that was near and dear to clients.” Adds to code this, I don’t think I would be able to make this Rogers, “Over the course of a couple of months, we whole thing happen operationally,” Nigito says, adding moved over all the order flow from the broker-dealer that he relied on Rogers for the back-end support and community over to the Island system.” operational deployment. After the integration, Rogers and Nigito each struck off “I was a bit of a perfectionist,” Nigito admits. “Chris was the great complement.” If Nigito were slow to finish a 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 the HFT firm’s New York office. While he can’t talk about what he worked on while he was there, sources say he built Getco’s dark pool and worked on building an options market-making business. And while Nigito is essentially barred for a year from pursuing future plans, it’s hard to Brian Nigito (left) and Chris Rogers (right) imagine he and Rogers not getting together again. ■

16 June 2011 • www.advancedtrading.com • ADVANCED TRADING Outrage over Wall Street’s failures inspired the most sweeping financial overhaul since the Great Depression. Barney Frank, the man whose name is on the bill, only wishes he had gone further. By Justin Grant The Man Behind the Law

rom the decriminalization of small amounts of marijuana to gay marriage, Barney Frank has been at the forefront of liberal causes throughout his three decades as a member of the U.S. House of Representatives. But when his time representing Massachusetts’ fourth congressional district is up, Frank likely will be remembered for two things: his colorful personality, and the co-authoring Fof the most dramatic rewrite of the laws governing the nation’s financial system since the Great Depression. The Dodd-Frank Wall Street Reform and Frank says the GOP ultimate- Consumer Protection Act forces nearly all financial ly backed down on its threat to services firms to rethink how they do business, from slash funds for the Securities which stocks they trade to how they disclose terms and Exchange Commission and to clients. And if the nearly 70 years it took for the Commodity Futures Trading industry to overturn the Glass-Steagall Act serve as Commission because that any indication, Frank’s influence undoubtedly will stance was unpopular with vot- be felt throughout the industry for decades to come. ers. “A budget cut was their side The 70-year-old Harvard Law School graduate attack on the rules. They played a pivotal role in preventing global finance from couldn’t deal with it head on, so tumbling over the brink. Frank, who presided over they tried it this way,” he says, the powerful House Financial Services Committee as noting that Republicans have the 2008 Wall Street collapse unfolded, helped craft since shifted their focus to delay- the unprecedented banking sector bailouts. Stripped ing derivatives reform until 2012. of his committee chairmanship following the House Republicans introduced Republican takeover of the House last fall, the Capitol a bill this spring that would delay Hill powerbroker now says the Democrats did enough new derivatives rules for 18 with the Dodd-Frank Act during their time controlling months. Although that legislation has little chance of both houses of Congress to thwart a similar crisis. becoming law since it’s unlikely Senate Democrats or President Obama would support it, Frank says the Back From the Brink tactic is a dangerous move for the GOP. “We came very close — according to Bush adminis- “They’re making a great mistake politically to put tration officials — to a situation as bad, if not worse off any new regulation of derivatives,” Frank con- than the Great Depression,” Frank tells Advanced tends. “That’s going to be very unpopular when you Trading. “We had two things to do: First, deal with look at the people’s concerns about speculation.” the crisis; but then do whatever we could to make it While Frank is mostly pleased with how the bill less likely it would happen again.” turned out, he acknowledges that it hasn’t been sold Despite a push by Republicans earlier this year to effectively enough to the general public. And he wish- neuter the Dodd-Frank Act by slashing funding for es the law were tougher on the derivatives market. the regulatory bodies tasked with making rules to But for the most part, Frank says, the Dodd-Frank enforce the new law, Frank says the bill is now law is as tough as it needs to be. equipped to work as planned. In April the nation’s “The bad mortgages, risky securitizations — I can’t commodities and securities regulators were given tell you that it’s going to prevent new problems,” Frank modest budget increases, which should aid their admits. “But if you look at all the causes of problems implementation of the Dodd-Frank Act. in the past, we made them much less likely to occur.” ■

ADVANCED TRADING • www.advancedtrading.com • June 2011 17 Richard Korhammer built Lava Trading to give institutional traders a better view of the market. Today, he’s still working to create new ways to unlock the power of information. By Chris Sandlund Setting Information Free

o hear Richard Korhammer tell it, Lava Trading was the result of the right people coming together to turn a good idea into a great reputation. But from its founding in 1999 until its sale to Citibank in 2004, the trading platform provider was guided by Korhammer’s vision — though he is quick to share credit with co- founder Kamran Rafieyan, the firm’s chief investment officer. TAt a time when electronic communication networks and alternative trading systems such as Instinet and Island were proliferating, Korhammer saw a need for consolidation. Traders needed access to each of these venues to ensure that they were getting best executions. But because the early ECNs were focused on day traders, each had its own front end — and institutional traders couldn’t fit 10 front ends 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 trading right 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 of my stints with the company was working on Wall Street helping technical traders with computer science back- grounds,” says Korhammer. “I got to experience the strate- offering unique products that meet market needs has a gies that firms like UBS and First Boston were trialing at tendency to drive that kind of growth. But Korhammer the time. It opened my eyes to what Wall Street was.” acknowledges at least one regret, of sorts — not adding Korhammer tapped that experience to build Lava’s plat- various classes of securities, such as the foreign exchange form from an institutional trader’s perspective. Unlike the offering Lava introduced in 2004, to the platform faster. other guys, “We routed to wherever and whoever achieved Citi sold LavaFX to FXall in January 2010. Now living the best price,” he says, likening Lava to cable television, in Brisbane, Australia, Korhammer is still innovating. He which aggregates channels from various providers. And is chairman of the Receivables Exchange, which enables like cable TV, it was addictive for traders. By 2002 Lava corporate clients to sell their receivables for immediate was handling 10 percent of Nasdaq’s volume. cash — bringing the centuries-old practice of factoring to an exchange. In the past, firms would negotiate with a Breaking Down Barriers single bank when factoring; the Receivables Exchange Of course, Korhammer faced barriers. Foremost among allows 50 firms to bid for a company’s receivables. them, sell-side brokers wanted customers to use their pro- Korhammer also is involved with Asia Online, a com- prietary order management systems to place trades. Lava pany that’s seeking to automate language translations. sought to be a central OMS that would pass electronic infor- And he is keeping an eye on auto-sensing application pro- mation to the sell-side brokers. “They didn’t want Lava to gramming interfaces (APIs), which he describes as “tech- communicate with their systems,” Korhammer notes. “We nologies that have the ability to readily adapt to commu- had to create very technical workarounds.” nicating with other providers in real time.” But Korhammer knew how to tap a crucial ally: his insti- Like all of Korhammer’s great ideas, it’s about freeing tutional customers. “We got clients to pound the table to the flow of information to bring people together. And he’s demand access from the sell side,” he says. got a pretty good track record for attracting the right peo- From there, Lava’s growth was meteoric. Of course, ple to bring those ideas to life. ■

18 June 2011 • www.advancedtrading.com • ADVANCED TRADING 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 Big Idea In Small Orders

hen stat arb trader Dan Mathisson was plucked from D.E. Shaw in Spring 2000 to run Credit Suisse’s prop desk, he had no idea that he would soon take part in an innovative effort that would radically transform equity trading. At the time, Mathisson ran a spread capture strategy that required wide spreads to make money. When decimalization hit in 2001, his strategy was destroyed, a setback at the time that would drive him to create a Wnew way of trading and earn Mathisson and Credit Suisse a place in Wall Street history. A decimalized environment, Mathisson says, promoted bid- technical skills — and that was the differentiator. “Ours was ding wars. “Everyone was penny jumping, and quotes were con- the first product aimed at traders,” Mathisson says. stantly flickering up or down by the second,” he recalls. “It was But making the idea a reality was a challenge. “I had an idea very difficult for traders to navigate. If they came in with any but had no idea how to make it real,” Mathisson acknowledges. size, they would be penny jumped, so they started [manually] Fortunatley, James Doherty, head of product development, “was chopping their orders into smaller orders.” able to make the back end reliable and elegant and not cost a All day on the trading desk, Mathisson recalls, he would hear fortune,” Mathisson relates. The initial product was built and complaints about having to slice up orders. “That is when the released internally on a Credit Suisse platform in February 2002. light bulb went on,” he says. “I had the technology to trade in an “We gave it out to anyone within Credit Suisse who wanted to automated basis and thought, ‘It wouldn’t be so hard to automate use it,” Mathisson recalls, noting that the first algo was a plain strategies that adjust quotes and send orders in smaller pieces.’” vanilla Volume Weighted Average Price (VWAP) tool, but it was About a month after decimalization hit Nasdaq stocks, the first time traders could control a maximum percent of vol- Mathisson presented a one-page business plan to management. ume and put in a limit price from their workstations. “The algo As a result, Credit Suisse would gain a first-mover advantage in was integrated into trading flows, was easy to use and the fills the algorithmic trading space for two years. came back exactly the same way they always did,” he explains. Internally, he notes, the product was a hit, but it was not gen- Innovation Upon Innovation erating any revenue. “We thought, ‘How do we distribute this At the time, Mathisson’s boss, Bob Jain, co-head of global equi- thing?’” Mathisson relates. “We didn’t want to have computers ties, was weighing an independent idea to set up an electronic on people’s desks — it would be too hard to support. We debated agency execution team. “Till that point, broker technology was a web offering, but the web wasn’t that mature at the time.” used to support your own traders, but no Enter Robert Maher, head of AES sales one had given clients access to their trad- for the EMEA. Maher had the innovative ing technology,” Jain says. (in 2001) idea to offer traders access to the “When I came to him with this idea for a product through a third-party system rather machine to chop up orders,” Mathisson than distribute and install software. adds, “he put it together with his agency A deal to provide Credit Suisse’s algos via execution concept and said, ‘Let’s do this.’” the Bloomberg terminal was quickly negoti- According to Mathisson, now managing ated and overnight Credit Suisse’s algo prod- director of Credit Suisse’s Advanced uct was in the hands of tens of thousands of Execution Services, the success of his algo traders. The sales pitch was simply, “Just machine was based on its ease of use. “Our walk over to your Bloomberg terminal and product was aimed at traditional clients try it.” And traders flocked to it. with no technology skills. The idea was to By the end of 2002, the business took make the computer interact with traders off. “From 2002 to 2004, we saw outrageous the way a floor broker does,” he says. While growth,” Mathisson recounts. In fact, it Credit Suisse had competitors, such as wasn’t until 2004 that Credit Suisse started ITG’s Quantex, they required coding and to run into competitors. ■

ADVANCED TRADING • www.advancedtrading.com • June 2011 19 David E. Shaw launched the modern hedge fund industry when he created one of the first purely computer-driven funds. By Kerry Massaro Quantitative Thinker

ven in founding the D.E. Shaw Group in 1988, David funds now trade soley based on Shaw was an innovator. For starters, he was one of mathematical models. the first statistical arbitrage traders to leave a bulge- Today Shaw lets the Ph.D.s run bracket firm (Morgan Stanley) to start his own hedge his firm’s models, while he contin- fund. Even more innovative was the way he went ues to innovate in another field. Eabout getting investors — rather than follow convention and Shaw returned to full-time scientific pitch the fund as being run by a super genius who could pick research, where he got his start winning stocks (think: George Soros or Steve Cohen), Shaw before becoming a trader, and now marketed his fund as one based on computer-driven models. leads research in the field of com- “He was the first person who said, ‘I am not a super genius putational biochemistry as chief scientist at D.E. Shaw Research. who knows the way the yen is going to go. I’m doing analysis In the late 1990s, Fortune magazine referred to Shaw as and using computers to trade ... based on historical data,’” “King Quant” because of his firm’s expertise in quantitative according to one Wall Street veteran who requested anonymi- trading. But the quantitative models Shaw created more than ty. “That was a unique way to set up a fund.” a decade ago continue to shape the markets. Much of the To fulfill his vision, Shaw hired a team of Ph.D.s to create language that currently defines quant trading can be traced the fund’s trading models — an innovation that, in essence, back to Shaw’s early work, and many of the latest innovations set the modern standard for hedge funds; the majority of in electronic trading are built on his vision. ■

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

he finance industry as we now know it essentially and CEO of Tabb Group. “And the began in the late 1970s with the creation of the securitization business is basically mortgage-backed securities business, just as Larry the story of modern finance. Fink was cutting his teeth on Wall Street. Long “The ability to understand and before becoming chairman and CEO of BlackRock, rearrange cash flows, fixed-income TFink was busy helping create the securitization market, analytics or the analytics behind arguably the defining financial sector of the early 21st century. interest payments is the whole sto- After graduating from UCLA’s Anderson School of ry of modern finance. ... This guy Management in 1976, Fink went to work as a bond trader at was core to making that happen.” First Boston. Three years later he was running the firm’s Fink’s career appeared to reach its nadir between 1986 mortgage-backed securities unit, a role in which he would and 1988, when his strategies lost millions of dollars for help shape Wall Street. Along with Lew Ranieri, at the time First Boston. But after being forced out of the firm in 1988, a bond trader and vice chairman at Salomon Brothers, Fink Fink teamed up with several partners to form the asset man- is credited with building the practice of securitization — agement firm Blackstone Group. buying debt such as mortgages and credit card balances Over the next 17 years, Fink built BlackRock into a jugger- from lenders, dicing them up and reselling them to investors naut that manages more than $3 trillion in assets. “He’s clearly — into the global, multitrillion-dollar business that it is today. one of the most powerful guys on the globe,” Tabb says. “The mortgage-backed business is basically the beginning “Because of the assets and commissions he controls, they can of the securitization business,” explains Larry Tabb, founder force the Street to do pretty much whatever they want.” ■

20 June 2011 • www.advancedtrading.com • ADVANCED TRADING Bill Porter’s vision for the International Securities Exchange opened a new world to options traders — their very own electronic exchange. By Phil Albinus A World of Options

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 that options could be traded only by hand, face-to-face, via established relationships. While other asset classes were making their way onto electronic platforms, bonds and options seemed destined to remain a gentlemen’s club where only a human touch Icould pass an option from one trader to another. “Everyone believed that options were too complex of the ISE on May 26, 2000, forever changed the way to trade and you needed physical contact on the floor options were traded. “It was the first all-electronic between brokers and market makers, and that was the options exchange in the U.S. — the first exchange to origin of floor-based trading for all derivatives in the bring a great deal of functionality and change into the U.S.,” recalls David Krell, now chairman and among options market,” says Katz. the first two employees hired at what would become “As Bill said on a few occasions at the time, it was the International Securities Exchange, the first elec- an overnight success that took three years,” adds Krell. tronic exchange for options. “So coming up with a According to the ISE website, today the exchange whole new approach that was very different from the trades more than 2,000 underlying equity, ETF, index consensus view was radical at the time.” and FX options each day. (Eurex acquired ISE in 2007 The need was clear, according to Gary Katz, presi- and runs ISE as an independent subsidiary.) dent and CEO of ISE. “Imagine a world where you Along the way to that ultimate success, the ISE didn’t know how many contracts you could trade. achieved a few other firsts: It was the first exchange that When you looked at the options markets, they only provided size along with quotes. “It was the first to have showed quotes and they didn’t show size,” he says. “If a front-end terminal for brokers and traders who wanted you were a professional, you didn’t know if you could to interact with the market. And it was also the first that trade at that price — you had to go to the floor, and brought intermarket competition, in that market makers the floor would only honor that quote for customers.” were able to quote and compete with each other to provide the greatest size to the market,” according to Katz. Secret to Success Did the men who founded ISE realize the importance In 1997, Bill Porter, who founded online brokerage of what they were doing? Katz E-Trade in the early 1990s, and colleague Marty says yes, but at the time he had Averbuch hired Katz and Krell, a pair of options experts to keep it to himself. “I told my who hailed from the New York Stock Exchange, to father when there were only build the first electronic options market. The four seven of us working on it and worked on the project in secret just at the time when I could not really tell him what computer networks were expanding, operating systems we were doing,” he shares. “I were becoming more stable and microprocessors were said it was going to change the doubling in speed every 18 months. way markets trade forever.” “We had to find market makers, we had to hire a staff, Porter and Averbuch could we had to hire a whole team. We had to get the computers not be reached for this profile. and build two data centers and get approval from the Porter lives in Hawaii, according SEC,” Krell says of the numerous challenges the group to ISE officials, and Averbuch is faced. He points out that this was the first time in 27 retired from the president and years that the SEC approved a brand-new exchange that CEO role of Adirondack Trading was not “grandfathered” from an existing marketplace. Partners, a consortium formed While the road was long and often arduous, the debut to finance the ISE. ■

ADVANCED TRADING • www.advancedtrading.com • June 2011 21 Financial services firms build their businesses on innovation. Protecting those advances is a full-time job. By Ivy Schmerken Keeping Secrets

inancial services firms build their fortunes on the back of innovation. Whether your firm has devised a new high-frequency trading strategy or launched an innovative mobile banking product, no doubt your company wants to protect its market position Ffrom competitors. But that’s more complicated than it sounds. “Financial services companies are seeking to protect illustrates the point. Goldman accused a former software their intellectual property assets with different forms of programmer of stealing source code from a high-frequency protection,” comments Allan Soobert, a partner with the trading system for a new employer, a start-up competitor, intellectual property practice of New York-based Paul, Teva Technologies. The programmer, Sergey Aleynikov, was Hastings, Janofsky & Walker, which represents major finan- convicted in December 2010 of stealing proprietary code, cial institutions in patent and infringement matters. and in March he was sentenced to eight years in prison. “Patents are one way of protecting IP; copyrights are anoth- One of the factors in Aleynikov’s sentencing, according er, and trade secrets are significant, as well. That mix of IP to experts, was his disregard for IP rights, including implicit protection is really what you see in the marketplace.” copyright and trade secret protections. Several IP lawyers Many aspects of financial services are worth protecting, from “We view the patents we have online transaction systems to automated approval processes. as assets of the company.” The creator of new software can —Chad Yohn, ConvergEx Group seek copyright protection from the U.S. Copyright Office, Soobert interviewed for this story noted that Goldman clearly would- says. In theory, the copyright actu- n’t want to disclose the details of its trading system in a ally is enforceable upon the com- patent. “They’d rather keep their secret sauce behind closed pletion of the source code, he doors,” says one attorney who spoke only on the condition explains, but a copyright holder of anonymity because his firm was not involved in the case. gets additional rights once the completed software is registered officially with the copyright office, a step that pre- Disclosure Has Its Benefits cludes anyone from copying that software. In exchange for full patent disclosure, however, firms get “But with copyright protection, you have to disclose it, a “better return,” suggests Steve Lieberman, a partner which has an effect on your ability to protect it as a trade with Washington, D.C.-based intellectual property law secret,” points out Chad Yohn, chief IP attorney at New firm Rothwell, Figg, Ernst & Manbeck. Lieberman was York-based broker-dealer and technology company the lead counsel for ITG in a patent infringement lawsuit ConvergEx Group, which recently received its ninth patent, brought by Liquidnet related to block trading systems. this one for LiquidPoint, an electronic options-trading plat- “In the trading technology space, financial services com- form. “We view the patents we have as assets of the companies have come to see that patents are very important,” pany,” Yohn says. he says. A second suit by Liquidnet against rival broker But in a highly secretive field such as high-frequency trad- Pulse Trading is still pending. ing, firms are reluctant to disclose innovations to the U.S. “A patent issued by the U.S. Patent and Trademark Copyright Office. “Copyright protection is narrow — it pro- Office is a legal monopoly — it gives you the right to stop tects the program as written,” Yohn explains. “Someone can anyone else from doing what’s covered by the patent in gain an understanding to the underlying logic and they can the United States. That’s why patents are such powerful invent around the patented software program.” As a result, tools in the financial industry — because they can shut firms often forego registering for copyright protection. down a competitor’s product,” says Lieberman. The recent intellectual property case involving the theft of “A patent gives you a monopoly over the product for high-speed trading software developed by Goldman Sachs 20 years,” he adds. “And you can enforce the monopoly

22 June 2011 • www.advancedtrading.com • ADVANCED TRADING Protecting Your IP

When Patents Attack

recent court decision has cast generic concept of a hedge,” relates Marc begun to scrutinize patents more thor- doubt on whether many business Pernick, partner and intellectual property oughly. The Bilski decision also has opened Amethods are eligible for patents. litigator at law firm Morrison Foerster. up new ground for declaring that existing The decision, which ruled that business “The Supreme Court ... said there is no patents are invalid, he adds. “The Patent methods can be too “abstract” to be patent- absolute problem with business method Office and the lower courts have made it ed, could impact financial services compa- and financial services patents,” Pernick tough on financial-services-related and nies seeking patents on business methods adds. “But if they are too abstract, then business-method patents,” Pernick says. that are not tethered to technology. they are no good.” To make patents more likely to withstand On June 28, 2010, the Supreme Court Pernick points out that there are challenges, Pernick advises, firms should tie affirmed a lower court’s ruling in the grounds within Section 101 of the U.S. them to computers and other physical tech- Bernard Bilski patent case, which sought to Patent Act itself for prohibiting patents nology. “That is certainly the best clue that protect a method that enabled commodi- on ideas that are too abstract. But, he we have about how to insulate your patent ties dealers to minimize risk through hedg- stresses, “for many years it was not in the financial services area,” he says. “The ing contracts. “All nine justices agreed that applied with teeth.” more a firm ties its invention to specific Bilski’s hedging patent was too abstract or Following the Supreme Court’s decision routers, databases and physical devices, the that it was not tethered to a concrete phys- in the Bilski case, according to Pernick, the better your chances of surviving one of ical application and was too close to the Patent Office and the lower courts have these patent attacks.” —I.S.

with an injunction against the competitive product.” Rothwell Figg’s Lieberman. “In order to [truly] protect that But patents aren’t air tight, Lieberman acknowledges. “In innovation, you need a patent.” litigation, patents can be found to be narrow and not infringed, According to Paul Hastings’ Soobert, many financial serv- and they can be found to be invalid or unenforceable,” he says. ices firms aren’t using patents to go after companies infring- Before diving into the patent application process, a coming on their IP; rather, companies are using patents to protect pany should weigh the benefits, says ConvergEx’s Yohn. The themselves against lawsuits from competitors. “They are analysis includes looking at the longevity of the innovation. using the patents to protect their assets in a defensive way,” The U.S. Patent and Trademark Office generally takes three Soobert says. “In case they are sued, they have the patents to six years from application to issuance, so if the innovation in their arsenal to protect their assets.” is in a fast-moving field, there may not be anything left to defend once the patent is issued, Yohn notes. ‘Trolling’ for Patents “We want to be viewed as innovators in the investment Financial services firms could encounter patent “trolls” or technology space, and we think that our patents support “non-practicing entities” that buy up patents and then go on that,” he adds. But rather than file for a patent, ConvergEx litigation sprees. “These companies don’t make anything; they may rely on trade secret rights as protection. In that case, just buy up other people’s assets,” explains Marc Pernick, a Yohn explains, the company can keep the nature of how it partner in the Los Angeles office of law firm Morrison developed or implemented the innovation confidential. Foerster with expertise in intellectual property litigation. To protect something as a trade secret, “You have to demon- One contentious case in banking involves DataTreasury, strate that you maintained the confidential nature of that inno- a small tech company that registered a patent for remote vation, and you have to further demonstrate that there has been check imaging in the 1990s. Banks were not convinced that a breach of that confidential information and that someone has they needed the technology until Congress passed a law misappropriated that secret,” explains Yohn. But, he cautions, allowing digital check processing in 2003. Then banks began “It takes a lot of cooperation — from the sales team to the legal inventing their own remote imaging applications, unaware team to the product team — to maintain confidentiality.” that DataTreasury held a patent on the technology. Since In fact, part of establishing that an innovation is a trade then, DataTreasury has sued nearly every major bank for secret is requiring any employee or consultant who comes infringing on its electronic check imaging patent. into the company to sign a confidentiality or proprietary But even when a financial services firm holds a patent, the rights agreement, according to Yohn. A classic example is litigation can go on for years, Pernick notes, adding that it’s Coca-Cola, which has successfully protected the formula for expensive and distracts from operating the main business. Coke as a trade secret for about 150 years. “Patent litigation costs millions,” he says. “Small cases can cost The down side? “If someone is able to reverse engineer $1 million, and larger, more complicated ones can cost $5 million what’s inside the black box, you have no protection,” explains or $10 million.” Which is why so many settle out of court. ■

ADVANCED TRADING • www.advancedtrading.com • June 2011 23 Protecting Your IP

When Patents Attack

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June 2011 Directory of Order Management System Providers

Advent Software/Moxy ...... 26 Fidessa/Minerva OEMS ...... 28 Bloomberg LP/AIM ...... 27 INDATA/Precision Trading ...... 29 Charles River Development/Charles River Investment Technology Group/Macgregor XIP . . .30 Investment Management System (IMS) ...... 27 Linedata/Linedata Longview ...... 30 ConvergEx’s Eze Castle Software/Eze OMS ...... 28 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 own information, which has been edited for space. For additional information on these companies, as well as directories of other capital markets technology providers, see our online directories at www.advancedtrading.com/directories.

Advent Software Moxy Description of System: How is ongoing support priced? Moxy, which is deployed at more than 850 firms worldwide, Term licensing model includes tiered support costs built into automates and streamlines the trading and order management the annual fee. process, from portfolio construction through settlement. With which accounting systems does the OMS integrate? What order-management functionality does the system offer? Integration to Advent Accounting products (Axys, APX, Geneva) is Asset allocation, portfolio modeling and rebalancing, pre- and post- standard. Moxy also can integrate to any third-party accounting trade compliance, electronic trading, dark pool and algorithmic platform. trading integrations, custodial notification, and post trade utilities Is there a remote, or “light,” version of the OMS that can be for settlement and clearing. used for business continuity/disaster recovery? What proprietary EMS functionality is included? Yes, Advent has a licensing model for BC/DR that is approximately N/A 50 percent of the annual license. Does the OMS integrate with any external EMSs? For what size and type of firm is the system ideally suited? Yes, Moxy integrates to any EMS system of choice for our clients With more than 850 firms ranging from $100 million to $60 billion using FIX connectivity. in AUM, Moxy is a flexible system capable of handling many client Which version of FIX does the OMS run? profiles. Advent serves institutional asset managers, wealth 4.0 and 4.2. managers, hedge funds, bank/trusts and broker-dealers with the Moxy platform. For which securities is the system designed? Global multi-asset capabilities, including equities, fixed income, What future enhancements are planned? Enhanced modeling capabilities, increased instrument coverage, and listed derivatives. expanded deployment options via the Advent OnDemand SaaS Which derivatives are supported? model, and international trading requirements. Listed options, futures, commodities and OTC derivatives. Contact Information: Does the system handle international securities? John Bird Yes. [email protected] 415-645-1387 www.advent.com

26 June 2011 • www.advancedtrading.com • ADVANCED TRADING Bloomberg LP AIM Description of System: Does the system handle international securities? AIM is Bloomberg’s buy-side order management system for Yes. Bloomberg AIM is a global system. We handle fixed income, order creation, staging and routing, position management, and equity, derivatives and currencies from more than 100 countries. compliance, through to financing and middle-office applications How is ongoing support priced? for trade matching and settlement. 24/7 support for the AIM platform is included with the licensing fee. What order-management functionality does the system offer? With which accounting systems does the OMS integrate? AIM offers order management applications for most asset classes, AIM integrates with most recognized accounting packages with including fixed income, equities, OTC and derivatives to both minimal custom integration. For unique packages, integration can internal and external execution platforms. be established leveraging our middleware software, which is What proprietary EMS functionality is included? included with the basic AIM licensing fee. AIM offers the Bloomberg EMS platform to all AIM clients. This is Is there a remote, or “light,” version of the OMS that can be a broker-neutral platform that integrates more than 1,500 used for business continuity/disaster recovery? destinations globally. The differentiating factor is the integration With Bloomberg AIM, there is no need for a “light” version for BC/DR. of real-time Bloomberg Data and Analytics. As an ASP, Bloomberg hosts the services, and through the Bloomberg Does the OMS integrate with any external EMSs? Professional, the services can be accessed from anywhere in the world. Yes. AIM integrates with several EMS platforms including Redi+, For what size and type of firm is the system ideally suited? Triton, RealTick, Passport, Neovest, and Lava via FIX. AIM also will AIM can be configured for any size asset manager, from firms with establish FIX connections to any major EMS application. $100 million to $100 billion in AUM. AIM currently has 500-plus clients Which version of FIX does the OMS run? globally, supporting both traditional asset managers and hedge funds. AIM Integration to EMS systems is currently based on FIX 4.2. AIM What future enhancements are planned? does have the ability to integrate on FIX 4.4 if requested. AIM will continue our focus on globalization, expanding our product For which securities is the system designed? coverage around the world. Enhanced cash management, FX trading, AIM supports most asset classes — global fixed income, equities and middle-office tools and dynamic integration options are also in focus. equity options, OTC products, derivatives, and FX all are supported. Contact Information: Which derivatives are supported? Patrick J Eldridge AIM supports CDSs, IRSs, index and single-name equity TRSs, listed [email protected] futures and options, OTC options, and FX futures and options. 212-617-6739 www.bloomberg.com/enterprise/trading_solutions/buy_side_oms

Charles River Investment Management Charles River Development System (Charles River IMS) Description of System: used by domestic firms trading internationally and by local firms in The Charles River Investment Management System is a multi-curren- more than 30 countries around the globe. cy, multi-asset-class front- and middle-office software suite that sup- How is ongoing support priced? ports 24/7 global operations and real-time electronic FIX trading. The annual lease for Charles River IMS includes provision of support What order-management functionality does the system offer? hours sufficient to address most clients’ support requirements. If Charles River IMS provides comprehensive functionality for decision needed, additional hours are available at an hourly rate. support and portfolio management; order management and e-trad- With which accounting systems does the OMS integrate? ing; real-time pre-trade, post-execution and end-of-day compliance Advent Axys, Checkfree Security APL, DST GPS, DST InfoQuest, Eagle monitoring and management; and centralized post-trade processing. STAR, FIN, FMC Pacer, IBS VPM, IDS GIM 2, Metavante, Princeton PAM, What proprietary EMS functionality is included? SunGard Invest One, SunGard AddVantage, and Thomson PORTIA. Broker-neutral, integrated EMS capabilities include trading interfaces Is there a remote, or “light,” version of the OMS that can be with 30-plus broker providers of algorithms; pre-/post-trade TCA; in- used for business continuity/disaster recovery? trade execution monitoring/analytics; DMA; automated order routing; The Charles River IMS architecture supports multiple options for high integration with data providers for real-time information; program availability/disaster recovery. Additionally, the Charles River Anywhere trading; integrated watch lists/charting; and customization options. component is a browser-based application that extends critical func- Does the OMS integrate with any external EMSs? tionality to remote users via mobile devices or Internet-connected PCs. FIX-based staging to external EMS systems is supported. For what size and type of firm is the system ideally suited? Which version of FIX does the OMS run? Charles River IMS supports investment firms in the institutional, Charles River Development supports FIX versions 4.0, 4.2, 4.4. mutual fund, banking, hedge fund, wealth management, insurance For which securities is the system designed? and pension industries — ranging from less than $1 billion in AUM All asset classes, including U.S. and international equities, listed and to more than $50 billion in AUM. OTC equity options, fixed income, FX, futures and complex derivatives. What future enhancements are planned? Which derivatives are supported? Further expansion in EMS capabilities, including additional algorith- Options, Futures: single-stock, bond, index. Interest rate swaps. mic, market data and TCA provider integration; enhanced portfolio Credit Default Swaps: single-name, index, index tranche, basket. Cross- management and analysis tools for equity/fixed income/derivatives; currency interest rate swaps. Constant maturity swaps. Overnight and a new performance measurement and attribution module. indexed swaps. Asset swaps. Basis swaps. Inflation Swaps. Total Return Contact Information: Swaps: equity, fixed income, basket. IRS swaptions. CDS swaptions. Brian Basiliere, Sales Executive Credit-linked notes. Mexican TIEE swaps. Brazilian pre-DI swaps. [email protected] Does the system handle international securities? 781-238-0099 Yes. The system handles securities from most global markets and is www.crd.com

ADVANCED TRADING • www.advancedtrading.com • June 2011 27 directory of order management system providers

ConvergEx’s Eze Castle Software Eze OMS Description of System: Which derivatives are supported? The Eze OMS is a global, multi-strategy OMS leveraging a real-time Both OTC and listed derivatives are supported, including forwards, open architecture to streamline the investment cycle for all asset futures, options, swaps, fixed income and credit products. classes. It provides functionality for portfolio management, Does the system handle international securities? Yes. compliance, trading and operations. How is ongoing support priced? What order-management functionality does the system offer? All support is included in the annual licensing fee for the product. Multi-currency, multi-strategy, multi-asset-class functionality. Flexible Eze Castle Software does not charge additional fees for implemen- real-time trade blotters, PM blotter and/or compliance blotter; event- tation, upgrades, or any ongoing maintenance and support. driven decision support analytics; flexible modeling and “what-if” analysis; automated asset allocation and order generation; real-time, With which accounting systems does the OMS integrate? intraday P&L and historical P&L; liquidity exposure and analysis; FIX The Eze OMS has established integrations with many accounting order routing to more than 500 sell-side destinations; more than 650 systems, including Advent Axys, Advent APX, Advent Geneva, BNYM algorithmic strategies from more than 60 brokers; single-screen order – AIS, Beauchamp, CheckFree APL, DPM, Eagle, Electra, EPAM generation and allocation for any asset class; execute list/program Princeton, FIN, IFA, Linedata MFACT, P2K, PMIS, SEI, SS&C Total Return, trades; pre-trade, intratrade and post-trade compliance checks; flexible SS&C AdvisorWare, SS&C, Hedgeware, SS&C Pacer, Simcorp, SunGard rule creation and management; rules libraries; open architecture for Invest One, SungGard Shaw, SunGard VPM, Thomson Financial integration with third parties, including 250-plus established interfaces; Portia, and Tradar. The Eze OMS’s flexible architecture enables commission management; and real-time monitoring and alerting. integration with proprietary accounting systems as well. What proprietary EMS functionality is included? Is there a remote, or “light,” version of the OMS that can be Single-click DMA to more than 65 global markets, accessing 95 used for business continuity/disaster recovery? percent of the world’s liquidity; FIX order routing; access to The Eze OMS provides failover/standby capabilities. It supports Level I and II market data; time and Sales, TCA, and market watches remote access via Citrix, Terminal Services or external network and charts. Eze supports broker-neutral access to algos, dark pools connectivity via trusted connections. Eze Mobile users can access and crossing networks for multiple asset classes. critical trading and compliance functionality via handheld device or web browser. Eze Hosting provides preferred access to leading Does the OMS integrate with any external EMSs? infrastructure providers offering ASP solutions for hosting off-site. The Eze OMS leverages a real-time open architecture to integrate with virtually any third party. We have established FIX connectivity, API and For what size and type of firm is the system ideally suited? SOA interfaces with the following ECN, ATS and DMA platforms: Fidessa, Eze OMS clients consist of traditional asset managers, hedge funds, FlexTrade, FutureTrade, Instinet, ITG Channel, Liquidnet, Liquidpoint, mutual funds and pension funds ranging from $500 million to MarketAxess, Morgan Passport, Neovest, Newport, Portal, Portware, $200 billion in AUM and from one user to 130 users. Radical, Triton, RealTick, REDIPlus, Sonic, InstaQuote, Tradeweb, Trading What future enhancements are planned? Screen, Trading Stream, Trading Technologies, Triact and UNX. For more information about our Product Road Map, contact Which version of FIX does the OMS run? [email protected]. 4.0, 4.1 and 4.2 Contact Information For which securities is the system designed? Sean Sullivan The Eze OMS leverages an event-driven, service-component [email protected] architecture designed to support all securities, including global 646-346-1140 equities, listed equity options, OTC equity options, fixed income, www.convergex.com foreign exchange, futures and credit derivatives.

Fidessa Minerva OEMS Description of System: support for softing, crossing, directed commissions and stepouts; and Minerva OEMS provides comprehensive order management and trade confirmation, both manually and via Omgeo CTM or OASYS. execution management in a single system, and is used by the world’s What proprietary EMS functionality is included? largest global asset managers through to specialist hedge funds. Broker-neutral, low-latency trading across the Fidessa network, with What order-management functionality does the system offer? integration with all major ECNs, including Liquidnet, Channel ITG, Simple order creation, including generic orders; order capture from Tradeweb, MarketAxess, BondVision, FXall, FXConnect and more; real- multiple sources; comprehensive pre-trade investment restriction time Level 1 and 2 market data, news, charting, IOIs, and market and sec- checking; and electronic, broker-neutral trading of equities, fixed tor indices; and calculation of simple user-defined trading strategies. income, derivatives and FX direct from the order blotter. The Minerva Does the OMS integrate with any external EMSs? OEMS offers broker-neutral, low-latency trading with instant connec- Orders can be sent directly to Alternative Trading Systems and ECNs tivity to 530 brokers globally; a wide range of broker algorithms; DMA via FIX, and can also be executed via DMA. Any executions received for global equity and listed derivatives markets; single and list orders; can then be sent downstream to an order matching application in real-time execution benchmarks; display of externally calculated the middle office or directly to the back office via the standard API. analytics; pre-trade TCA; full support for fixed-income and quote- driven trading methods; support for global trading requirements; Which version of FIX does the OMS run? real-time cash viewer for current and future positions; automatic, real- Minerva OEMS is agnostic to which version of FIX is run. It can support time allocation of executions to block orders; multiple allocation version 4.4, but most Minerva OEMS clients currently use version 4.2. algorithms; automatic calculation of commissions and fees; full (continued on next page)

28 June 2011 • www.advancedtrading.com • ADVANCED TRADING Fidessa (cont.) Minerva OEMS For which securities is the system designed? Sentinel can integrate. A sample list of systems with which Fidessa’s Full asset class support for equities, fixed income, listed and OTC buy-side has already integrated includes DSTi’s HiPortfolio derivatives, money markets, and FX. Multifonds, Linedata’s Icon IDS GIM II, Simcorp’s Dimension Portia, SunGard’s Decalog, Pleiades’ T-Star, Eagle’s PACE, Tradar, Linedata Which derivatives are supported? Beauchamp, and SunGard InvestOne, as well as many in-house (We are continually adding support for new asset classes.) Interest Rate: systems and data warehouses. par swap, ad hoc swap, swaption cap & floor. Bond Option Credit: asset swap, credit-linked note, total return swap. Credit Default Swap: single- Is there a remote, or “light,” version of the OMS that can be name, CDS index, CDS. Inflation: zero coupon IIS; year-on-year IIS. FX: FX used for business continuity/disaster recovery? N/A options — vanilla and barrier non-deliverable forwards. Equity: OTC For what size and type of firm is the system ideally suited? equity options, equity swaps — price return and total return. Minerva OEMS is suited to global asset managers with desks in Does the system handle international securities? multiple locations, as well as smaller boutique investment Fidessa’s buy-side has a global customer base trading a variety of managers, wealth managers and hedge funds. instruments, including international equities, bonds, and listed and What future enhancements are planned? OTC derivatives, denominated in multiple currencies with full FX Further support for money markets, program trading and TCA. hedging capabilities. Contact Information: How is ongoing support priced? Cindy Arcari Unlimited support is included in the annual license fee. info@fidessa.com With which accounting systems does the OMS integrate? 617-235-1003 There is no restriction on the fund accounting systems with which www.fidessa.com

INDATA Precision Trading (Part of the IMS Suite of Products) Description of System: Which derivatives are supported? Precision Trading, INDATA’s broker- and network-neutral OMS, links Fixed Income/Derivatives: Handles all fixed-income security types; traders with portfolio managers, executing brokers, and compliance and includes specialized trading modules for mortgage-/asset-backed securi- back-office staff in real time, resulting in error-free trading. Precision ties and cash management, interest rate swaps and credit default swaps. Trading is part of the IMS Suite of products. The system is available as an Does the system handle international securities? Yes. in-house or hosted/ASP solution with full technology outsourcing. How is ongoing support priced? What order-management functionality does the system offer? Annual recurring fee includes software updates and new version Portfolio Modeling, Compliance and Analytics: robust portfolio model- releases. In addition, other services are available (customization, ing and rebalancing, and comprehensive “what-if” analysis across training, etc.) for an hourly fee. All version upgrades are included in asset classes; multi-security swapping features along with condition the client agreement with no additional costs. In addition, INDATA “if/then” order generation; multi-currency, multi-asset trading; tax maintains a full-services offering that allows OMS clients to out- lot tracking tools; family and group trading capabilities; and fully source their system administration. integrated analytics. Real-Time Pre- and Post-Trade Compliance: monitoring, including regulatory compliance; easy-to-use compli- With which accounting systems does the OMS integrate? ance wizard for rule setup and maintenance; “what-if” scenario for Interfaces include Advent Axys, Advent APX, GIM 2000, Pacer, compliance rules and real-time checks; easy rule customization. PORTIA, CheckFree Security APL, FIN, All SunGard platforms (PORT, Electronic Trading: handles automated directed brokerage and step- Portfolio One, etc.), all Trust Accounting systems from SunGard out creation; real-time blotter analytics with complete integration of (AddVantage, Charlotte, etc.), SEI, InfoVisa, and most other industry live pricing and analytical data from third-party providers; and other portfolio accounting systems. EMS functionality, including effective program and list trading tools, Is there a remote, or “light,” version of the OMS that can be extensive connectivity with established algorithmic trading used for business continuity/disaster recovery? providers and dark pools, integration with third-party TCA providers, Yes, in addition to a full-service, real-time DR offering. connectivity with all major ECNs, electronic order routing via FIX, For what size and type of firm is the system ideally suited? and extensive commission tracking and reporting capabilities. The range of assets under management is from $50 million to more What proprietary EMS functionality is included? than $100 billion. The typical client is a buy-side asset management Real-time data and analytics are available directly within the system. firm with a blend of institutional, taxable accounts, mutual funds, Precision Trading is one of a few broker-neutral and network-neutral and hedge funds. INDATA has a number of clients that use the solutions within the space. Unlike other providers, INDATA doesn’t system for the trading of international securities and also has clients “take a toll” from brokers by maintaining its own FIX network. that use the product exclusively for fixed-income trading. Does the OMS integrate with any external EMSs? What future enhancements are planned? Yes — most major EMS solutions within the marketplace, via FIX Ongoing enhancements to underlying functionality. connectivity and API. Contact Information: Which version of FIX does the OMS run? Sylvia Morgan All FIX versions supported, including 4.4. [email protected] For which securities is the system designed? 858-847-3000 All major asset classes are supported — both domestic and interna- www.indataweb.com tional (i.e., equities, fixed income, cash instruments, futures, options, derivatives). Long/short.

ADVANCED TRADING • www.advancedtrading.com • June 2011 29 directory of order management system providers

Investment Technology Group Macgregor XIP Description of System: number of ATSs and EMSs, including: Aqua, BIDS Trading, BLOCKCross, Macgregor XIP is a broker-neutral solution that combines portfolio Bloomberg Trade Book, Goldman Sachs REDIPlus, INSTINET management and trading applications with a fully integrated and Newport/Portal, LAVA, Liquidnet, Morgan Stanley Passport, Neovest, supported financial services network. Designed to help asset NYFIX Millennium, PIPELINE, Townsend, Trading Screen, UNX. FIX con- management firms execute their investment decisions with increased nectivity, API, SOA and a variety of Windows programming languages speed, control and efficiency, Macgregor XIP is customizable, extensi- are used to integrate Macgregor XIP with external systems. ble and easily integrated with your preferred internal and external Which version of FIX does the OMS run? applications to correspond with the way you do business. FIX 4.0 and FIX 4.2 through use of ITG Net. What order-management functionality does the system offer? For which securities is the system designed? Portfolio Management: With comprehensive equity, fixed income and The Macgregor XIP OMS was designed to support all security types, derivatives functionality and a multifactor order-generation optimiz- including equities, fixed income, derivatives and currency (hedging er, Macgregor XIP enables you to make faster, more accurate deci- and settlement obligations). Futures and options trading is available. sions that are closer to your portfolio limits. Perform “what-if” analysis with integrated real-time market data to determine the pre-trade Which derivatives are supported? impact of proposed orders. Model and rebalance to target against Swaps, bank loans and option straddles are included. Can provide indexes, statistical models, composites and cash flows. Display unlim- custom tickets to match client requirements for various derivatives ited security-level attributes and unlimited, alphanumeric user- and can continuously provide targeted derivative functionality that defined fields. Run a full pre-trade compliance check to ensure matches client’s trading requirements. adherence to investment and regulatory guidelines. Customize port- Does the system handle international securities? Yes. folio holdings views in a spreadsheet-style grid. And more. How is ongoing support priced? Trading: Macgregor XIP includes advanced electronic trading capa- The account is transferred to the support desk, where clients can ask bilities and multi-security execution tools. Locate liquidity with about software functions or troubleshoot a problem (included in global electronic connectivity to exchanges, ATSs, ECNs, numerous license fee). Additional services are on a time and material basis. broker algorithms and more than 350 broker destinations. Includes With which accounting systems does the OMS integrate? integrated access to the ITG POSIT crossing suite and ITG single Advent Axys, Advent APX, VPM, Citco, IFS, Tradar, State Street and stock, list-based and dark algorithms. Integrate easily with third- Quasar accounting and admin interfaces. party EMSs or ITG Triton, ITG Radical or Channel ITG. Generate a trade ticket unique to the security type with full audit trail and Is there a remote, or “light,” version of the OMS that can be online historical trade data. Manage orders easily with trading capa- used for business continuity/disaster recovery? bilities for programs, lists and single stocks. Analyze execution costs, Macgregor XIP supports multiple methods of configuration of the manage risk and analyze broker performance with integrated pre- OMS for disaster recovery/business continuity scenarios. These trade and post-trade analytical tools ITG Logic and ITG TCA. involve client hardware deployment and network choices so as to Optional Modules: ITG Compliance and Macgregor Post-Trade are enable varying levels of recovery. standalone applications also available fully integrated with Macgregor For what size and type of firm is the system ideally suited? XIP for a truly comprehensive enterprise solution. Automate pre-trade Hedge funds and traditional asset management firms, ranging from and portfolio-level compliance and improve reporting capabilities $1 Billion to more than $500 billion in assets under management. with Macgregor Enterprise Compliance. Macgregor Post-Trade is an What future enhancements are planned? ASP solution designed to automate downstream trade processing, Further improvements to our integration between Macgregor XIP including matching, confirmation, allocation and settlement. and Triton, including the ability to split orders directly from Triton Automates exception handling and includes plug-and-play and to apply compliance restrictions from ITG Compliance. Second- connectivity to post-trade utilities, including Omgeo and SWIFT. generation OMS trade blotter GUI to improve XIP’s trading experi- What proprietary EMS functionality is included? ence when not used with Triton. Support for thin-client architecture. ITG provides a seamless integration between Macgregor XIP and our Contact Information: broker-neutral Triton EMS, allowing clients to take advantage of Triton’s [email protected] pre- and post-trade analytics, Level II quotes, POSIT crossing, etc. 212.444.6300 without requiring the user to “stage” or “commit” orders to the EMS. www.itg.com Does the OMS integrate with any external EMSs? In addition to integration with Triton, Macgregor XIP integrates with a

Linedata Linedata Longview Description of System: asset-class solution that can handle swaps, covered bonds, repur- The Linedata Longview order management system provides real- chase agreements and bank debt. Key functionality includes multi- time transparency and insight, helping you quickly see, understand currency, multi-asset-class, multi-site support; seven-level hierarchy and respond to opportunities. Linedata Longview provides a highly portfolio modeling; reporting module; compliance monitoring; configurable and comprehensive global trading system to support highly configurable interface; real-time data integration; advanced the needs of portfolio managers, traders and compliance officers. rebalancing; rule-based order routing; high-volume execution What order-management functionality does the system offer? capabilities; integrated broker FIX connectivity with Linedata LyNX; Linedata Longview is a multi-currency, multi-geography and multi- and fully deployed, ASP or facilities management installations. (continued on next page)

30 June 2011 • www.advancedtrading.com • ADVANCED TRADING Linedata (cont.) Linedata Longview What proprietary EMS functionality is included? accounting packages because of the ease in creating the appropri- Longview can be deployed with EMS functionality — including ate file formats. Common systems supported are Linedata’s market data and full electronic liquidity access to more than 400 (Linedata Mfact and Linedata Beauchamp) in addition to solutions broker destinations — and with Linedata’s new advanced trading from Eagle, SunGard, SEI, Advent, Thomson, CheckFree (ALP and solution, Linedata Trader+, which was developed with pure broker GIM) and Princeton. All interfaces to accounting packages can be neutrality at its core. The platform enables traders to eliminate run in a batch, intra-day or real time. Linedata can supply a more multiple trading systems and maximize screen real estate by comprehensive list if needed. allowing individuals to choose their necessary tools. Is there a remote, or “light,” version of the OMS that can be Does the OMS integrate with any external EMSs? used for business continuity/disaster recovery? Longview integrates with Linedata Trader+ via FIX connectivity, Fully deployed, ASP or facilities management installations. offering a flexible workspace, reliable pre-trade compliance checks, execution management functionality and integrated workflow. For what size and type of firm is the system ideally suited? One half of our clients represent the largest institutional asset man- Which version of FIX does the OMS run? agement firms in the world, including 10 of the top 25 asset man- We currently support versions 4.0, 4.2, 4.3 and 4.4. agement firms as measured by AUM and some of the most actively For which securities is the system designed? trading firms in the world. Linedata has a growing client base in Linedata Longview supports the full range of securities across the mid-size asset management firms and hedge funds through our major asset classes: equities, fixed income, mortgages, money mar- ASP environment. Linedata Longview also is present in a significant kets, foreign exchange, funds, options, futures and swaps. number of large wealth managers, including firms with in excess of Which derivatives are supported? 100,000 accounts and 300-plus concurrent users on a single data- Examples of specific derivative types supported by Linedata base instance. Linedata has experience supporting the following Longview include but are not limited to futures and options types of firms: in-house discretionary/non-discretionary, SMA, WRAP, (globally listed and OTC), barriers, spreads, straddles, covered private wealth, institutional, hedge funds and mutual funds. writing, collars, Asian, and Australian. What future enhancements are planned? Does the system handle international securities? Future enhancements include added security coverage, audit, Yes. Linedata Longview supports all global and multi-currency securities. workflow and user interface, increased throughput, expanded portfolio management capabilities, and preparation for growth, How is ongoing support priced? scalability and support for Linedata’s ASP and service businesses. Software maintenance provides clients with access to support and a dedicated, named relationship manager. Additional service offerings Contact Information: are available and structured to meet the needs of individual clients. Linedata Sales With which accounting systems does the OMS integrate? getinfo@linedata,com Linedata is agnostic when it comes to supporting interfaces to 617-912-4700 www.linedata.com

SGGG Porfolio Systems Description of System: Which derivatives are supported? The system provides powerful tools for the full fund Both OTC and listed derivatives are supported, including forwards, management process. futures, options, swaps, ﬁxed income and credit products. What order-management functionality does the system offer? Does the system handle international securities? The system provides tools for order management, compliance, The system handles securities from all major global markets. settlement and reconciliation. It supports multiple portfolios, How is ongoing support priced? strategies, asset types, currencies and prime brokers. All support is included in the monthly licensing fee. There are no What proprietary EMS functionality is included? additional fees for implementation, upgrades or any ongoing The system is capable of receiving and processing two-way FIX maintenance and support. messages from any FIX-capable EMS. The SGGG Portfolio System With which accounting systems does the OMS integrate? is broker-neutral. N/A Does the OMS integrate with any external EMSs? Is there a remote, or “light,” version of the OMS that can be How is it integrated? used for business continuity/disaster recovery? The SGGG Portfolio System has integrated via FIX connectivity with N/A all of the broker-sponsored EMS platforms and is in production environments with all of the major EMSs. For what size and type of firm is the system ideally suited? The OMS capabilities are great for small and mid-size hedge funds. Which version of FIX does the OMS run? FIX 4.2. What future enhancements are planned? N/A For which securities is the system designed? All asset classes are supported: U.S. and international equities, listed Contact Information: and OTC equity options, ﬁxed income, foreign exchange, futures and Dan Rissin complex derivatives. [email protected] 416-644-1861 www.sgggpsc.com

ADVANCED TRADING • www.advancedtrading.com • June 2011 31 NEW! Advanced Trading direct to your inbox…

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Subscribe Today! Just answer a few simple questions and you’re set for the year. To get started, visit www.advancedtrading.com By Larry Tabb Founder and CEO of street cred Westborough, Mass.-based TABB Group, a financial markets strategic advisory firm. [email protected]

The Worst Market Ever

o paraphrase (poorly) Winston Churchill, connectivity isn’t cheap. In addition, competition is our equity markets are the worst form of fierce and commissions are being driven downward. market structure “except all the others that For brokers, reducing exchange payments puts money have been tried.” Our current market struc- directly back in their pockets; negotiating the fragment- ture is competitive, fast, innovative and ed market environment, however, is problematic, as is cheap — all to a fault. The problem is, each supporting the various buy-side players with a wide Tmarket participant has different demands and trading array of tools and services. strategies, making it difficult to solve market structure The current market structure generally benefits liquid- challenges; helping one constituency tends to hurt another. ity providers — not because the SEC drafted beneficial The market can be segmented into five major con- regulation, but because the more modern liquidity stituencies: issuers, investors (retail and institutional), providers crafted their business models based on the new brokers, liquidity providers (market makers, high-fre- rules. While the current structure benefits these players, quency traders and day traders), and market centers competition, low volatility, decreasing order flow, and (exchanges, ATSs, ECNs, MTFs, SEFs and organized trade the growth in internalization and dark pools have reduced facilities). Each of these constituents has different the flow with which this demographic interacts. Lower demands and concerns. If regulations favor any con- retail trading volumes also hurt internalizers, many of stituent to the detriment of others, the market can be which are liquidity providers as well. thrown out of balance, not only impacting trading vol- While the structure benefits newer liquidity providers, umes but also the allocation of capital to corporations, older market markers, specialists and day traders have which translates to jobs. found it challenging. The fragmented market coupled with the technology investment, sheer analytical capability and A Retail Boom Structurally, the market has never been better for retail investors. While the majority of retail orders is internalized How do you fix this mess by wholesalers, spreads are tight, transaction costs are low, technology is extensive and, for small orders, liquidity and keep the various market is abundant. Retail internalization typically is not a problem for retail investors; it is challenging for institutions entities in balance? and liquidity providers. Confidence is the problem for retail investors. Post-financial crisis and post-Flash Crash, pure speed needed to compete have all but knocked small- the individual has little market confidence and even er and less-automated players out of the market. believes the game is rigged. Market centers that have invested in speed-enabled Institutional investors have more confidence, but they infrastructures also have benefited from the newer regu- also have greater demands. They need liquidity, have a lations. While old-line exchanges have had to invest in hard time trading blocks, and believe exchange flow is technology to maintain market share, exchanges also are toxic because most desirable flow is internalized or traded finding a vibrant business in providing market technolo- in the dark. Since buy-side firms can’t trade blocks, they gies. The largest challenge to exchanges is internalization have an over-reliance on broker technology, algorithms and dark trading. The more shares that are internalized and dark pools. This becomes a self-fulfilling prophecy: or traded via ATSs, ECNs, MTFs and OTFs, the fewer As blocks disappear, traders employ dark pools and algos, there are to match on the exchange. With more than one- which reduces block executions and forces flow into third of the U.S. market now being traded off-exchange, algos and dark pools. Speed also is a disadvantage for this is a central topic not only for exchanges but for most the buy side, as market makers and liquidity providers market participants as well. leverage colocation, putting the buy-side trader micro- to With virtually every segment complaining about some milliseconds behind the fastest liquidity providers. market structure challenge, the questions is: How do you Brokers managing buy-side flow increasingly need to fix this mess and keep the various market entities in bal- invest heavily in technology. The development of trading ance? Or are some entities (such as issuers and investors) algorithms, dark pools, smart order routing and market more important than others? ■

ADVANCED TRADING • www.advancedtrading.com • June 2011 33 By Ivy Schmerken at the close Editor-at-Large, she covers trading for both Wall Street & Technology and Advanced Trading. [email protected] The Stuff of Legend

have met many innovators over the course The joint venture was designing OTC derivatives of my career reporting on financial technol- with NeXT workstations to speed up application ogy and electronic trading, enough to know development. Craig Heimark, a managing partner that the real force behind Wall Street is the of the O’Connor Group and head of the SBC/OC people, not the machines. Today’s era of high- venture, told me at the time, “It’s better to take risks frequency trading, complex derivatives and with technology than [with] your balance sheet.” Ielectronic exchanges didn’t just arrive overnight. It’s Despite Jobs’ reputation as an innovator, how- taken decades of work by innovators in finance and ever, NeXT had a hard time gaining critical mass in technology — people who blazed a trail in market the capital markets, where Sun Microsystems dom- data distribution, middle- and back-office operations, inated. But that didn’t matter to Jobs. He ended up options pricing models, portfolio construction, basket going back to Apple to rescue the company and trading, matching engines, and more. introduce to the world the iPod, iPhone and most So what are the characteristics of innovators? I recently, the iPad tablet. asked my husband, who is an engineer and whose father was an inventor, of sorts. (In the 1970s, he Paving the Way on the Street invented a phone meter that allowed consumers In the same way that Jobs set the standard for digital to measure the cost of routing a call through the consumer media, there have been key innovators nearest central office.) While my father-in-law’s on Wall Street who laid the groundwork for the ingenuity never resulted in a big payday, he modern financial industry and influenced genera- nonetheless turned his family’s house into a factory tions of traders to come. I often think of Leo and enlisted his four children to work for him. One Melamed, the former CME chairman emeritus who was the architect of Globex, the CME’s electronic trading platform, in the late 1980s. Melamed, who Innovators tend to be writes science fiction in his spare time, envisioned the future — and he saw the global growth of obsessed with their ideas. futures exchanges. Like many innovations, Globex had a rocky start and faced resistance from traders in the pits, but eventually Melamed’s vision was val- time he even took apart the family television set, idated and the CME went electronic. refusing to call a repairman, but lost interest and Steve Wunsch also comes to mind. Before the never put it back together again. term “dark pool” was even muttered, Wunsch, a for- Shaped by that experience and traumatized by mer VP at Kidder Peabody, teamed up with com- several engineer bosses who fancied themselves puter scientists from Cray Research to develop an as pioneers, my husband tells me, “Innovators tend auction system for stocks that completely bypassed to be eccentric and obsessed with their ideas. They brokers and exchanges. Institutional investors also tend to be ahead of their times, and they can would enter their orders and stipulate the prices also be socially inept. But they have charisma and they would accept. Then three times a week, the attract a cult following.” computer would sort through the orders and find Steve Jobs offers a perfect example. Though he the equilibrium price. While computerized markets was forced out of Apple, the company he founded, such as Jefferies Posit (before it was sold to ITG) in 1985, he kept at it, founding NeXT, which built and the Instinet Crossing Network already existed, the NeXT Computer workstation that made they used the prices from the exchanges, whereas inroads on the Street in the 1990s. Jobs sold the Wunsch’s system set its own prices by matching NeXT workstation to Wall Street firms such as institutional buyers and sellers. O’Connor & Associates. At the time, observers noted that Wunsch was In 1989, Chicago-based O’Connor & Associates, testing the limits of Wall Street. Clearly, that trait — a proprietary options trading firm, formed a joint the desire to disrupt the status quo — is another venture with Swiss Bank Corp., SBC/OC Services. characteristic of innovators. ■

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

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