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Risk Management: In the Eye of the Storm

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NSX Cuts In

Price of Pre-Trade Controls: Zero?

December 15, 2010
By Tom Steinert-Threlkeld

Since November, Saro Jahani has been working on a crash project: Introducing pre-trade risk controls into the connections his company provides high-speed traders to National Market System venues.

That means, of course, he will have to decide what his company, the National Stock Exchange, will charge for it.

“Most probably, nothing,” the NSX chief information officer said in the firm’s offices in Jersey City.

That is, of course, one way to clearly differentiate yourself in a market where filtering orders from customers being given direct access to markets through sponsoring brokers has become a technical requirement. That became the case when the Securities and Exchange Commission banned “naked” access, with no pre-trade controls, in November.

Indeed, “we look for opportunities to differentiate ourselves,’’ said Joseph Rizzello, chairman and chief executive of NSX Holdings. “We have to.”

That’s because NSX has not the name-brand recognition of the New York Stock Exchange or Nasdaq – or even relatively newborn exchange operators like Direct Edge or BATS Global Markets.

Nor does it have the wherewithal.

Where NYSE Euronext spent $500 billion building new data centers in Basildon, England, and Mahway, N.J., Jahani, operating out of NSX’ new headquarters in Jersey City, has spent more like $500,000 building out his competing system for connecting brokers to the 10 financial data centers that count in New York and New Jersey.

Indeed, NSX has to excel on four characteristics if it is to find a way to distinguish itself from the NYSE or any other of the licensed national exchange operators, says Rizzello: stability and reliability, speed, service and cost.

That last may hold the greatest resonance, because it is the easiest to quantify. For access to its Risk Management Gateway and its pre-trade controls, for instance, NYSE Euronext charges $3,000 a month for a single-channel connection. Each additional channel or “session” is $1,000.

By comparison, Rizzello and Jahani are charging a setup fee of $700 and then $1,000 a month for customers of any size to use its 10-city network of connections to National Market System exchanges. That’s pretty much passing through the cost of the Sidera network. NSX makes it money on order flow.

And, when Jahani’s project is done, the pre-trade filtering of orderings may just become a “value add” of the service, included for free.

Where NYSE Euronext’s 400,000-square-foot data center an hour away stands out on a hillside in Mahwah, N.J., NSX’ approach is to put its entire exchange in 10 different places. In one cabinet, in each center.

This is what Rizzello and Jahani call an “exchange in a box.” A single cable in a single center makes the cross connection. You hook it up to your trading engine. Then, ride over fiber connections that NSX already pays for from Sidera Networks, to get to any of the other data centers. Make trades at high-speed, wherever your smart order router wants to send them. All for one grand a month.

NSX is something of a pioneer in electronic trading. In 1980, it replaced its physical trading floor with a completely automated marketplace. That made it the first all-electronic stock exchange, even beating the Nasdaq Stock Market to that claim, Jahani notes.

But now, as Rizello notes, it has to prove it stands out in stability and reliability. Four years ago, NSX introduced a new trading platform, called Blade, that almost immediately burst at the seams at 30 million and 40 million shares a day., Jahani said.

NSX now does about 100 million shares a day. And NSX Blade last experienced a brief system outage in October 2009, due to a hardware issue.

The exchange-in-a-box – with, maybe soon, risk controls just part of the package – is its low-cost way to prove itself. Brokers and trading firms don’t have to co-locate their servers at multiple centers. Just one. Then, they can ride on NSX’ network in the fastest possible route to any destination.

“NSX does not have the deep pockets of others,’’ said Jahani. “What we do is simplicity.”

 

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