Are Regional Stock Exchanges Seeking an Alternative to ITS?

Regional exchanges are considering smart-order-routing technology to help them comply with Reg NMS' new trade-through rule, which requires execution venues to route orders to the market displaying the best price.

Several regional exchanges have contacted IBSN, a Denver-based provider of integration and order-routing solutions that offers the Dominet order-routing network to 45 sell-side firms, according to Colin Clark, IBSN's president and founder. He declines to name which regional exchanges have contacted his firm.

According to Clark, execution venues are looking for an alternative to the Intermarket Trading System (ITS), an electronic communications network that links nine U.S. markets - the New York, American, Boston, Chicago, National, Pacific and Philadelphia stock exchanges; the Chicago Board Options Exchange; and the NASD. "Under Reg NMS, what we're hearing from the regional exchanges is that they are afraid that the new costs of using ITS are going to be prohibitive," says Clark.

"Reg NMS appears to be directing people toward private linkages," says David Colker, CEO of the National Stock Exchange (NSX). "Though I've heard nothing specific to ending ITS, [IBSN] would be something we would consider. I'm sure they would do a competent job."

The NSX uses IBSN's message translation technology on its specialist workstation for firms that need to translate orders into different protocols, such as FIX (Financial Information Exchange), Colker notes. "That's been useful to us for both our internal and external routing," he says.

Going forward, regional exchanges likely will need smart-order-routing technology to compete with other markets, especially the New York Stock Exchange, which is acquiring electronic rival Archipelago, Colker acknowledges. "The fact that the NYSE is going to have to automate creates an opportunity for the other marketplaces to compete more fairly," he asserts.

Under the trade-through rule, Reg NMS mandates that all equity markets ensure that their quotes are accessible instantaneously or risk being ignored. This is expected to lead to more electronic trading and smart order routing.

"With respect to smart order routing, we're committed to providing all the necessary capabilities that any exchange is going to need to remain competitive," says Colker, though he declines to cite specifics. "Certainly, smart order routing is going to be a requirement in order for our brokers to meet their best execution obligations," he adds.

According to IBSN's Clark, to help the exchanges compete, IBSN is releasing a "faster and more cost-effective alternative to the ITS." He explains that the offering will be built on the existing Dominet order-routing technology, which Clark describes as "rock solid" and proven in the market. Dominet offers smart order routing and scans all the execution venues to find the best price, adds Clark.

Clark says he's lined up verbal commitments from several of the regional exchanges to join an advisory committee. IBSN will respond to the advisory committee's suggestions in order to shape its technology to address the exchanges' needs, he says. By working with multiple exchanges, Clark continues, IBSN will be able to pass cost savings as a result of economies of scale back to the exchanges and specialists, as well as other clients.

The Contenders

However, other order-routing-network providers also may contend for the exchanges' business. According to the NSX's Colker, those providers may include Lava Trading, SunGard/BRASS and other order aggregators in the Nasdaq world.

IBSN's Clark notes that IBSN competes with Lava Trading and NYFIX, but he asserts that they have "different offerings with some overlap."

Clark contends that IBSN does not own a crossing network, and so it doesn't compete with the regional exchanges. However, NYFIX owns the NYFIX Millennium Alternative Trading System for listed stocks, and Lava is a subsidiary of Citigroup, he points out. "We're very attractive to [regionals] because we don't compete with them. We're not a broker-dealer," Clark emphasizes.

Additionally, while some order routers charge customers for the number of shares per order, IBSN does not charge in relation to the economics of the order, Clark adds. "It's a monthly subscription fee [based on] how many exchanges you're hooked up to," he explains. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio