TCS Daily

Financial Evolution, Revolution

By Nick Schulz - October 21, 2002 12:00 AM

Editor's note: Last week NASDAQ unveiled SuperMontage, a new $100 million electronic trading platform. The platform is designed to let investors see five price levels of stocks, and not just the currently accessible best price. Tech Central Station editor Nick Schulz spoke with Bruce Turner, the Managing Director responsible for U.S. equity trading at CIBC World Markets about the new technological architecture.

TCS: What is SuperMontage and how do you use it?

Turner: What is SuperMontage? That's like saying what is air. [laughter] SuperMontage is the next logical progression for the NASDAQ stock market.

In a world prior to SuperMontage, market participants have the ability only to put in one quote at one level. That's not because people want to keep orders out of the system. It is a matter of functionality that only allows one quote per participant.

What SuperMontage does is it allows people to put in multiple levels of orders. And what that does for the market is a couple different things. From the investor's point of view, obviously now there's more information. So you can make better trading decisions. And there's also better comfort in having your orders in the system because they'll be displayed at multiple levels. Now I can put in hundreds of orders in each stock at any level I choose. So that's obviously a huge benefit for the investing public, both the small investor and the institutional investor.

And then from the market making - what I call the sales side of the equation - it's better for us in two ways. It now enables us to offer that functionality to our customers. And we can use its better technology and faster technology to allow us to increase the productivity of our traders.

By that I mean in today's environment, and this varies from firm to firm, but there's usually a set ratio, a fairly narrow ratio, of what the number of stocks is one person can trade, say, 40. So if I want to go up by 200 stocks, I've got to go hire five more traders.

Now I envision a world where I can have one trader where if he currently handles somewhere between 25 and 40 stocks, that same trader could be responsible for maybe, say, 100 stocks. That number changes based on the kinds of stocks, but an average of 100 stocks is about right because SuperMontage gives me the ability to put orders on the book and not worry about them and knowing that I am meeting my execution obligations. I'm helping the market by posting that liquidity and I'm offering a broader, deeper product to both my internal and external customers.

TCS: As I understand it prior to this architecture, traders only saw the best bids and the best offers, I understand it goes five levels deep or so...

Turner: Right. Okay, this number five, we've got to be a little careful about it. What that is talking about is the number of levels that NASDAQ is going to dynamically display. And it depends on what data feed service you get from NASDAQ. There are three different levels of services. So in an aggregate form you can get the first five levels dynamically. That's one feed. And then if you want to get the components that make up the aggregate, that's another feed. That will also go to five levels.

Now that doesn't mean that people can only put in orders within five levels. Dynamically when you look at the screen you'd only see me in the first five. But the depth would be there and, in a non-dynamic fashion, you can query the book to any level. So the five is really only about dynamic level display. It's not about the ability, the number of levels you can put orders in.

The other thing, too, to realize is that five is somewhat arbitrary in terms of bandwidth. That was just a number that NASDAQ could get to and publish it on their systems and on their network. You know, at some point with either new technology or new packet technology or something, I know that it could go deeper.

TCS: I know that some key players, in particular the electronic communications networks, ECNs, were claiming that SuperMontage would damage competition. Is that true?

Turner: I think that ECNs still have a valued position in the market and I don't think SuperMontage gets turned on and six weeks later all ECNs die and go away. I just don't think that'd happen.

TCS: What's their concern as you understand it?

Turner: SuperMontage gives people a lot of functionality that ECNs have now, that in the past the sell side hasn't necessarily had without using an ECN. So I think their fear is that all of a sudden we'd stop using ECNs. Well, ECNs have other values, other reasons we may use them besides the fact that we gain this new functionality.

TCS: What about the New York Stock Exchange? How is this different?

Turner: Well, the New York Stock Exchange has something called Open Book which gives you the look at the book. The problem is, one, it's non-dynamic. And it's not directly connected to any execution facility. So you can look at it all day long, but you can't click on it and make anything happen.

Whereas, you look at the book in SuperMontage, you click on it, you're hitting or taken to that level. And you're getting, if you're the first one there, you're getting what's there. So the fact that it's connected and it's auto execute I think gives it a big plus.

TCS: You mentioned that what SuperMontage is sort of doing is giving market makers a little bit of the functionality that they had with ECNs. I'm trying to get a sense of the effect, the overall effect, of this system. Is it revolutionary or is it more . . .

Turner: Evolutionary?

TCS: Yes.

Turner: It depends on what front you're looking from. If you look at it from an exchange point of view, NASDAQ versus New York, it's pretty revolutionary. If you look at it from what's going on in the ECN world, I would say it's more evolutionary and I'm just careful with that word because evolutionary means inherently slow change.

TCS: Right.

Turner: It's certainly the next logical progression that NASDAQ would take from where they were. Is it a quantum leap? No. SuperMontage is dependent on the sell side's ability to take advantage of all that functionality. And, unfortunately, this isn't a fertile environment right now and so people are more resource-constrained than normal.

TCS: Okay. Well, thanks so much for taking the time to talk to us.



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