Reg NMS is Forcing First- and Second-Tier Prime Brokers to Gear Up and Be Competitive and SEC-Compliant, Says TABB Group

New York, NY - 14 March 2007

Estimates that Broker Spending in 2006-2007 on RegNMS for Low-Latency Connectivity, Order Routing and Market Data Aggregation to Exceed $80 Million

A new TABB Group research note released today, “Reg NMS: Launching the Next Arms Race”, reports that brokers’ trading systems are changing at an even faster pace in response to the implementation of Reg NMS by the SEC, requiring even higher levels of routing complexity, faster execution speeds and bulging storage capacity. According to Larry Tabb, CEO and TABB Group founder, “this is the first report industry-wide that examines the state of brokers in a post-Reg NMS period since its recent implementation. It focuses on what brokers are doing and how Reg NMS will impact their future positioning.”

Beginning in 2006 and continuing into 2007, TABB Group estimates that 80% to 90% of broker spending strictly for RegNMS allocated towards low-latency connectivity, order routing and market data aggregation will exceed $80 million. For storage alone, brokers need now to store between two and five terabytes of data per day – compared to only 250 to 500 gigabytes per day in 2005 – with storage for top-of-book data primed to grow over 60% compounded annually through 2009.

According to Matthew Simon, research analyst at TABB Group and author of the note, “While this affects all brokers trading on the US markets, each one addresses it in a unique way that aligns best with its size, strategy, positioning and budget. The impact of these different approaches is and will continue to be considerable, separating the top trading firms from the rest of the pack, determining winners and losers in the trading game and shaping the efforts of providers of technology that touches all areas affected by Reg NMS.” This is occurring, he adds, as the U.S. equity market continues to increase in complexity at a pace faster than at any other time in its history.

Although no broker remains immune to Reg NMS’ impact, Simon explains that, “some have had far less to do than others in direct response to the rules, depending primarily on their strategy, industry position and current trading infrastructure.” Competitively, as sources of liquidity become less transparent, each broker’s smart router grows in importance. Regardless of size, they have needed routers to cope with the market landscape, adapting to changing levels of liquidity and cost considerations. Today, Reg NMS is providing the impetus to accelerate their development, heightening what TABB Group calls “the competitive arms race.”

Simon notes that alternatively, smaller brokers currently relying on the exchanges to route their order are facing a challenge in obtaining advanced routing capabilities to stay competitive.” Without the depth of understanding,” he adds, “as well as resources to address the need for considerable improvement to their systems, second-tier brokers are looking to the growing group of service providers to assist them – welcome news as these new rules come at a time when adhering to stricter guidelines is the last thing they want to think about.”

Commenting on the research, Tabb adds, “At the same time they’re building up their trading systems, top brokers have to ensure that they maintain the flexibility and open-mindedness of Reg NMS’ impact on the markets. However, the greatest test will continue to be faced by those brokers that are smaller or otherwise not considered part of the ‘bulge bracket’.”

The report also covers connectivity strategies, new message types, storage, pros and cons of aggregating data and a vendor sampling covering the six most important areas of Reg NMS – connectivity, compliance, ITS replacement, low-latency market data, smart routing and storage.

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