Make Way For The New Execution Model: Inter-Market-Broker

Apr 1 2009 | 1:37am ET

By Jay Berkman -- Those who have traded over the counter derivatives or fixed income products are aware of the integral role played by inter-dealer brokers. Firms such as Cantor Fitzgerald, Prebon, GFI, ICAP, and other boutiques have historically provided an important link between primary dealers seeking hard-to-fill liquidity on behalf of their respective institutional clients and prime brokerage hedge fund customers.

Within the exchange-listed product arena a variety of wholesale market brokers—both traditional voice-based, and more recently, dark pool crossing networks—play similar roles, typically facilitating orders in large share blocks for both actively-traded and less-liquid issues.

However, as exchange-listed equity options, index products, and ETFs attract more and more capital, these seemingly transparent, screen-based markets are actually becoming fragmented, thanks to the large number of liquidity pools, trading centers and competing market-making participants. Consequently, buy-side and sell-side traders focused on these direct access products are faced with the challenge of sourcing optimal liquidity, while also getting the most efficient pricing for hard-to-execute trades. In turn, hedge fund managers and traders are increasingly turning to inter-market-brokers—those that seamlessly connect to multiple market centers and the wide array of market participants.

One example of an inter-market-broker is New York-based order execution boutique WallachBeth Capital. WB’s team of former proprietary equity option traders and exchange brokers are at the core of the actual market, sitting on top of walls that separate market participants. Through open-line connections to sell-side facilitation desks, exchange floor traders, off-floor market-making firms and buy-side managers, WB is the Switzerland within a highly-competitive trading world,  providing neutral, unbiased services to market-makers, trading desks, regional dealers, and hedge funds.

“The fact is, however pervasive screens have become, they’re rarely three dimensional. Accessing the real liquidity and discovering the best pricing requires picking up a phone or sending someone an instant message,” said David Beth, co-founder and president of WallachBeth. “We know that prime broker trading desks are absolutely irreplaceable when it comes to servicing a customer that insists upon split-second immediacy, but we’re equally sensitive to the nuances of executing an order. We know that many trades, whether initiating or closing, don’t or shouldn’t require split-second execution. That’s when a sell-side PB desk or a buy-side hedge fund trading desk will contact us directly. They know that best fills, as measured by execution price, market impact and execution cost are secured by shopping around, and that we’re at the heart of the wholesale supermarket.”

The true value of firms such as WB is apparent not only because inter-market brokers are often the defacto color commentators of the internal market place, but because they are product specialists that are uniquely positioned to facilitate the execution of a large block of trades, a complex spread or a thinly traded ETF, often within the market’s prevailing bid/offer quotation.

Jay Berkman is a 20 year securities and options market veteran, and currently a principal of JLC Group, a marketing/business development boutique. A former member of the CBOE, Amex, and NYSE, Berkman played a senior role in the development of BondNet, a pioneer electronic trading platform for corporate bonds, and he has advised, amongst others, Bank of New York Mellon, high yield bond firm Miller Tabak Roberts Securities, Interactive Brokers, and energy trader MBF Clearing Corp.


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