Brown Brothers Tackles STP For Overseas Nasdaq Orders

What-s this'a global custodian behaving more like an Internet broker than a stodgy bank?

Brown Brothers Harriman, which receives crossborder order flow in U.S. stocks, has become a one-stop shop for executing small retail orders and providing integrated clearance and settlement services.

Recently, Brown Brothers teamed up with Davidge Data Systems, a New York-based software company that specializes in order routing, to extend its small order, straight-through processing system to Nasdaq stocks. Davidge-s flexible middleware system, called DavNet, will allow the bank to accept retail orders less than 1,000 shares from more than 500 overseas financial institutions that use the bank as both a U.S. sub-custodian as well as an agency-only broker. And now it-s even looking to expand that capability to European banks to help them compete with online brokers like Charles Schwab and E*Trade that are muscling in on their home turf.

During the fourth quarter, Brown Brothers expects to roll out a 'wholesale" electronic execution product in 17 other markets around the world, as an adjunct to its global custody business, reveals Andrew Tucker, partner.

'This really marries the execution brokerage business with the custody business," says Andrew Tucker. He adds, the trend is for global custodians to increasingly become active in the execution brokerage business.

But Brown Brothers isn-t the only global custodian heading in this direction, admits Tucker, who points to Bank of New York-s 1997 acquisition of ESI Securities, a leader in automated execution, as evidence of a similar thought process, he says.

It-s all part of the straight-through processing mantra that-s sweeping the industry as a prelude to shorter settlement periods, the ongoing pressure to drive down costs and burgeoning interest in electronic trading.

Overseas demand for high technology and Internet sectors which trade on Nasdaq are what-s driving the demand for the small order, straight through processing system, says Wesley Oler, manager of the bank-s trading department. Over the past two years, banks that manage retail portfolios have stepped up their demand for buying and selling Nasdaq stocks, he says.

These include clients such as Lloyds Bank in London, Dresdner Bank in Germany, UBS in Switzerland, ABN Amro and Japanese banks, which are typically global custodians in their home markets. To make the arrangement economically enticing, Brown Brothers waves the clearance and settlement fee if the client uses it to execute the trades.

'What we-re trying to do is build a capability where the small trades that come from these folks, they can just send to their custodian and have them executed by our brokerage area and then cleared and settled seamlessly with us," says Oler. Right now, BBH has an automated system for NYSE-listed stocks, but the Nasdaq orders have to be rekeyed by BBH personnel into the market makers- proprietary execution systems.

The current system, dubbed, BBH Connect, routes small orders from Brown Brothers- clients in Europe, Asia and the Carribbean into the bank-s mainframe systems where they are then sent to the New York Stock Exchange for execution on the SuperDOT system. The orders come into BBH-s mainframe through three points of entry: the Bloomberg system, Liberty Intertrade Direct, a Reuters subsidiary, or the S.W.I.F.T. 502 messaging protocol to purchase and sell equity securities.

Says one European bank that uses the Bloomberg terminal to route orders to BBH, 'If they put up this system and they can confirm the trade, the same way they confirm the NYSE exchange, that is a timely advantage, because a lot of customers want to have their report as soon as possible," he says.

According to Oler, Davidge is building the connections to Nasdaq market makers such as Knight Securities and Herzog Heine Geduld. Oler hoped to be 'up and running with Davidge" in October or November.

At its core, DavNet is an order routing server or messaging switch which manages client connections, 'which can be FIX connections'for instance Bloomberg uses FIX Financial Information Exchange as its protocol'or API connections or Davidge fat-client connections," explains CEO Nick Davidge. Another order entry platform that could be used is GL, which merges market data, trading and analytics. The message-oriented middleware transforms messages to Davidge-s own meta-format, applies them to a routing table and then handles the assured delivery to a destination, he explains. Then it changes the message formats and does the whole process in reverse, delivering execution reports in real time, and integrating with the firm-s backoffice. Once it passes through the order routing and validation, the order can be routed to a Nasdaq market maker, or up to 38 destinations that Davidge covers, including exchanges, ECNs and backoffices of broker/dealers.

Ready, Go, Fire

One reason for choosing Davidge was that DavNet was an off-the-shelf application that would be 'cheaper and much quicker to implement," says Oler. Though he considered middleware companies such as New Era of Networks (NEON), he excluded them from the outset because they didn-t have something off-the-shelf that was being used. He also looked at ADP and Trinitech Systems, but they didn-t have anything as extensive or flexible or in use as actively as the DavNet product, which is used by 40 to 50 broker/dealers around the Street. Because of its flexibility, the DavNet middleware will support many more types of entry platforms, 'some that may not exist now or may not be contemplated now," as well as entry over the Internet, says Oler. In fact, BBH is talking with several Internet brokers in Europe about sending orders from their retail clients over the Internet into DavNet.

Internet is another Outlet

BBH is about to launch a global execution product which will allow its clients in the U.S. or Europe to execute equity trades in 17 other markets around the world. BBH is already in pilot with a couple of European clients and plans to roll out the full blown service in the fourth quarter. Tucker says it-s geared toward, say, a French bank, who-s using BBH as its global custodian, that also wants to execute trades in 17 other markets. BBH would not be the executing broker in these 17 markets, but would provide the connectivity and order routing, working with a few big brokers and Liberty, he says.

'We see that as the future for the Belgian bank to head off Schwab is to have their own e-trade capabilities," says Tucker, adding: 'And we obviously would be the back end." 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