Veteran Fintech Entrepreneur Tells His Story For The Path to Electronic Trading Series
The Path to Electronic Trading for Mark Smith started in a pool. He wanted to be an Olympic swimmer, a singular focus that took him to the Olympic trials of 1988 and 1992, but not to the Olympic Games, though he did swim in the Pan American games of 1991.
That competitive drive earned him a job with Raymond James as a junior investment banker in Florida; however, a client quickly told him his future was as an entrepreneur. So Smith embarked on his first start-up, a day trading shop.
Smith used his two years of broker-dealer experience with Raymond James to start a pre-internet-era day trading shop. He said the SEC made becoming a broker dealer like baking a cake: there is a recipe for it and you just have to follow it.
In those days, customers had to come to an office and lease a space and a terminal, pay transaction fees and be overseen by a compliance person. But Smith and his partners quickly figured out the real money was being made in other aspects of the business, especially the infrastructure and technology sides.
So they hired some developers and reimagined the software and built a match engine to help save on clearing and settlement costs. Smith said they built the right technology at the right time and created Nextrade, which became the seventh ECN approved by the SEC.
To build the ECN, they leveraged the work of others. The leaders of the Island ECN had been very transparent about what they were doing, which helped.
To apply to become an ECN, Smith and his partners read through all the no action letters and applications of competitors granted by the SEC and cut and pasted liberally from them to craft their application.
He said building a match engine was not difficult, the hard part was driving order flow, building the markets. At this stage of his career, venture capital was represented by Visa cards, Smith said.
The technical requirements to be approved as an ECN back in those days were not very high, Smith said. All they had to do was connect to the SEC via a modem, run a script and that was about it.
Smith said they ran Nextrade for about four and a half years and had become the fifth largest of 15 that had applied to the SEC and 12 that had become truly operational. Nextrade sold the firm’s assets to Citi, the first of two times Smith would sell a business to Citi.
Citi was not interested in running the ECN, but they were interested in running different products with the no-action letter. Citi acquired the technology and the no action letter, leaving Smith and his partners to mothball the broker-dealer left behind.
The value for Citi was in the ECN, and after Reg ATS passed, ECNs were in a special category with special rights to be able to charge fees for accessing quotes.
Smith said all ECNs are ATSs, but not all ATSs are ECNs.
Smith looked next at the world of foreign exchange trading to apply the electronic trading principles and technology to their markets. He and partners would start Matchbook FX, working with Deutsche Bank to create an FX market similar to the market they had in equities.
MatchbookFX was the first to offer access to displayed quotes in the FX market. MatchboxFX would later be sold to London-based CMC Markets.
Smith then took all his knowledge and experience from Nextrade and MatchbookFX and became a founding partner of Lava Trading. It was Lava Trading that would be sold to Citi, leaving Smith to work at Citi for 2 years.
In part two, we will find out where Smith will head next in his path to electronic trading.