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Cutter
Associates, on behalf of the Banc of America Securities
Electronic Trading Services Group, recently conducted a
survey of buy-side use of Direct Market Access (DMA) products
and Algorithmic Trading Systems. Conceptually, DMA products
are consoled-based buy-side views of sell-side liquidity.
They include level two access to the depth and breadth of
the specialist book. Below are the summary results of this
survey which was conducted with a select group of buy-side
firms and Hedge Funds. The survey focused on the use of
DMA systems as well as the wider Alternative Trading System
services market in which DMA falls. The ATS order flow of
survey respondents varies from less than 10% to as much
as 50%.
Growth of Order Flow Expected
Over half of the respondents believe their ATS usage will
increase by an average of 15 percent over the next twelve
months. In general this shift is evenly spread between crossing,
DMA and algorithmic alternative trading systems. In one
third of the cases, this shift favors algorithmic trading,
while crossing and DMA seems to stay constant. Twenty percent
of the firms expect no change in their usage of ATS services.
In terms of DMA usage mix between OTC, Listed, Options,
Futures, and International order flow, DMA usage of OTC
and Listed trading seem to split evenly depending on the
Asset make-up of the client. Over the next twelve months,
that mix appears unchanged for active DMA users and only
increases for new users. Options, Futures and International
usage is negligible for this sample group.
In order to double DMA usage flow, respondents agreed,
by two to one, that improving Listed security liquidity
was most important - followed by OMS integration using FIX.
ATS and OMS Integration is Vital
While no OMS integrations and limited OMS interfaces
are used today, all current DMA users desired (demanded)
complete OMS - DMA integration, so these systems can become
completely inter-operable. They desired a workflow that
originates in OMS and forwards orders to their DMA system.
From there they would be able to work and update these orders
in either their DMA or OMS. However, they want these two
systems to stay in sync throughout the life of the order,
including changes, corrections, cancellations and executions.
The larger firms particularly care about this requirement.
Evaluation Criteria
The criteria that clients use to evaluate potential ATS
services varied widely. There were, however, some consistent
favorites, including service reputation, supported order
types, best execution, liquidity and anonymity. OMS integration
with FIX and liquidity were consistently sited above all
others.
Best commission was broadly rated as considered, but
not critical in importance. The availability of Microsoft
Excel loading, market data, and non-listed and OTC asset
types were surprisingly lesser valued than one might have
expected. There were some soft references to the importance
of reduced latency delays and the speed of loading of orders.
Secondary Notes
- There was overwhelming consensus on the part of the
respondents that DMA and algorithms compete for the same
order flow.
- All but one respondent thought the pending SEC/NYSE
regulations will increase ATS and DMA usage.
- There was broad agreement that all of the respondents
have evaluated alternative trading systems within the
past three months.
- Respondents overwhelmingly believe they are getting
fair value using DMA services. In the two interviews in
which the respondent did not feel DMA provide value, better
execution, better commissions and better cost-analysis
were the stated reasons.
- All but one respondent said that they were able to use
DMA to pay for research, although many of them wanted
more flexibility in arranging payment.
- Respondents, whose numbers were tilted toward buy-side
firms, agreed seven to one that their DMA services were
not bundled with any other services.
- Expected execution price and order size versus security
liquidity were the two primary factors used by respondents
in evaluating which type of trading method would be used
to trade an order. Order volatility, momentum, sector,
pre-trade cost and PM directions played a smaller role
in choosing a trading method.
- Respondents were evenly divided about plans to change
to an alternative vendor - whether that would be in the
next three months, six months or not at all.
When asked what would happen if Program Trading was
enabled in DMA, four respondents said 'no change', three
said 'more flow, but only if integrated more' and two didn't
know how it would change.
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