The Front End of Electronic Futures Activity: Black Box vs. Grey Box; Independent Software Vendors, the Industry Participants Perhaps Most Responsible for the Explosive Growth of Electronic Trading, Have Not Been Rewarded for Their Innovations. Is a New Era in the Offing?
Schirr, Gary, Modern Trader
Institutional independent software vendors (ISV) in the futures markets such as Trading Technologies (TT), Patsystems, EasyScreen, GL Trade, RTS, NYFIX, Ffastfill, and a host of others, provide the software to connect a trader to the electronic futures markets. The ISVs have played an integral role in the growth of electronic futures trading, but have not prospered from the success of electronic futures trading to the extent of the exchanges and brokerage firms. One of the ISVs, TT, is currently seeking to enforce its patent on a popular front-end interface, citing the need to reward innovation as well as the disparity in profits for ISVs vs. other industry participants. Developments in front-end interaction in electronic futures trading are focusing on fund, professional and institutional derivatives trading.
THE IP WAR: BRING ON THE LAWYERS
The headline news in the futures ISV community for the past year has been the intellectual property battles resulting from TT's efforts to enfore its patents on MD Trader, a single-click system to enter orders directly onto a market depth screen (see "MD rules," right). Some of TT's traditional ISV competitors including Patsystems, Ffastfill, Rolfe and Nolan, and RTS reached agreements with TT swiftly.
Meanwhile, legal warfare continues between TT and both eSpeed and Refco. Industry insiders suggest that this could be the beginning of a pattern: TT coming to agreements with its traditional competitors but having protracted battles with new entrants who view the futures trading capability as an add-on for other products and services. Those that view futures execution as an auxiliary service may disrupt the traditional and already thin pricing in the ISV community.
For example, eSpeed offers the capability to spread futures against the cash bond market using the functionality acquired from EccoWare. Although such multi-market spreading is attractive to users, eSpeed may be motivated to offer artificially low pricing for futures access to bring additional flow to its core U.S. Treasury note and bond market. Similarly, Refco has clearing services and other products to sell futures execution clients.
A statement on a chalkboard at the Chicago office of CQG Inc. says it all, "TT? CQG is free!" CQG is offering execution capability at no extra charge to customers already subscribing to its premium charting and analysis service. Therefore the TT patent battles may involve both protecting TT intellectual property and protecting the ISV industry pricing structure.
As part of the settlement with TT, Patsystems is replacing its former market depth entry screen, DOME, with a new screen, Reflector, which does not fix the center of prices on the market depth display, an approach taken by others seeking to avoid the TT patent.
Patrick Kenny, managing director of Patsystems, says the switch to Reflector is a concern for traders used to DOME, but he adds, most traders adapt quickly to the change, noting that only 4% to 5% continue to have trouble with the new view. While not wishing to disrupt users, Kenny says the switch has been a net positive. "More TT users have moved to Pats screens due to TT [enforcement] actions than Pats users migrating to TT because of the change in the market depth display," says Kenny who characterized relations between the two ISVs as friendly.
Developments in many of the TT patent cases are fast-moving but the resolution of the eSpeed and Refco suits are likely to be more significant to ultimately defining the TT patents and intellectual property than the series of agreements that are being announced currently. The rights to the most popular market depth implementation are important. According to Alex Lamb, COO of EasyScreen, prior to its acquisition by Refco, the single-click market depth approach is "well on its way to becoming the standard for futures order entry, totally replacing the order-ticket or form approach. …