What Is Advance Computerized Execution System (ACES)?
The Advance Computerized Execution System (ACES) was an electronic order routing system developed by the National Association of Securities Dealers (NASD) and operated by Nasdaq. Falling under the broader category of Electronic Trading Systems, ACES facilitated the efficient flow of orders between order-entry firms and market maker firms that had established trading relationships. It allowed order-entry firms to access a market maker's internal trading system for routing orders, streamlining the process of sending and confirming trades.,6
History and Origin
The Advance Computerized Execution System (ACES) emerged as part of the evolving landscape of automated trading within the Nasdaq market. Launched by the NASD, which later became part of FINRA, ACES was designed to improve efficiency in the over-the-counter (OTC) equity market by automating the process of routing orders. Originally, ACES also had an execution function, but this aspect was largely phased out in 1998 following the introduction of new order handling rules by the Securities and Exchange Commission (SEC). These rules encouraged Nasdaq participants to manage their order files internally rather than relying on ACES for direct execution, though the acronym ACES retained the "E" (Execution) for historical reasons.,5 A technical specification for the system, known as NASFAQ - FIX ACES, was also provided to aid in its integration. NASFAQ - FIX ACES - Programming Specification (PDF)
Key Takeaways
- The Advance Computerized Execution System (ACES) was a Nasdaq-operated electronic order routing system.
- It facilitated order flow between order-entry firms and market makers with established relationships.
- ACES was a voluntary service for market makers who paid a subscription.
- While it initially had an execution function, this was largely eliminated in 1998 due to new SEC order handling rules, evolving primarily into an order routing and reporting interface.
- ACES automatically sent trade information to the Automated Confirmation Transaction Service (ACT) for trade reporting.
Interpreting the Advance Computerized Execution System (ACES)
ACES primarily served as a mechanism for order routing, allowing broker-dealer firms to direct customer orders electronically to specific market makers. Its functionality meant that smaller order-entry firms could automate their order flow without needing to build extensive, standalone automated execution systems. The system provided a standardized interface for firms to interact, enhancing the speed and reliability of order placement and confirmation within the Nasdaq ecosystem. Market makers could authorize specific order-entry firms to send them order flow through ACES, and the system would automatically send trade information to the Automated Confirmation Transaction Service (ACT) for reporting purposes.
Hypothetical Example
Imagine a small regional brokerage firm, "Regional Brokers Inc.," in the late 1990s that wants to efficiently route its clients' orders for Nasdaq-listed stocks to its preferred market maker, "Global Market Makers." Instead of manual phone calls or faxes, Regional Brokers could subscribe to ACES and establish a routing relationship with Global Market Makers through the system.
When a client at Regional Brokers places an order to buy 100 shares of a Nasdaq stock, Regional Brokers' system would format this order for ACES. ACES would then act as a "pass-through" interface, directing the order directly into Global Market Makers' internal trading system. Global Market Makers would execute the trade internally, and an execution confirmation, along with a trade report, would be sent back to Regional Brokers via ACES. This process, enabled by ACES, would significantly reduce the time and potential for errors compared to traditional methods, enhancing the overall efficiency of the transaction.
Practical Applications
The Advance Computerized Execution System (ACES) found its primary application in the facilitation of order flow within the Nasdaq stock exchange for companies listed on the Nasdaq Capital Market and Nasdaq Global Market. It was particularly useful for order-entry firms seeking to automate their process of directing customer orders to designated market makers. ACES streamlined routine order entry by routing orders directly into a market maker's internal system for automated execution and subsequent notification back to the order-entry firm.4 This infrastructure played a role in the evolution of electronic trading by providing a cost-effective solution for firms to establish direct connections and automate their interactions in the market, particularly before more comprehensive electronic communication networks (ECNs) became prevalent. The system also ensured that trade information was automatically sent to the Automated Confirmation Transaction Service (ACT) for essential trade reporting.
Limitations and Criticisms
Despite its utility in automating order flow, the Advance Computerized Execution System (ACES) had limitations, particularly as market structures evolved. A significant shift occurred with the introduction of new order handling rules by the SEC in 1997. These rules, including the "Limit Order Display Rule," required market makers to display customer limit order prices that were at or better than their current quotation.3
Prior to these rules, ACES limit orders were not directly linked to the inside market calculation and did not automatically update market makers' quotes. This created a challenge for market makers using ACES, as they became responsible for manually checking their ACES limit orders against their quotes to ensure compliance.2 This regulatory change effectively diminished ACES's role in the direct execution and automatic quote updates, pushing market makers to develop more robust in-house systems or rely on other solutions for compliance and efficient order management.
Advance Computerized Execution System (ACES) vs. Small Order Execution System (SOES)
The Advance Computerized Execution System (ACES) and the Small Order Execution System (SOES) were both automated systems developed by NASD/Nasdaq that played roles in the evolution of electronic trading. However, their primary functions and target users differed.
ACES was an order routing system that allowed pre-established relationships between order-entry firms and market makers. It functioned as a "pass-through" for orders, enabling firms to direct client orders directly into a market maker's internal system for execution. Participation in ACES was voluntary for market makers, who subscribed to the service.
In contrast, SOES was a mandatory automated execution system designed specifically for small public customer orders. It provided automatic execution against the best available price (the inside quotation) for orders up to a certain size. SOES became notable for the rise of "SOES bandits," traders who exploited its mandatory execution feature and speed for rapid profits, leading to debate and changes in market structure. While ACES facilitated the routing of orders based on existing relationships, SOES was focused on providing immediate, automatic execution for small retail orders against published quotes, regardless of the market maker's specific relationship with the order-entry firm.
FAQs
What was the primary purpose of ACES?
The primary purpose of the Advance Computerized Execution System (ACES) was to provide an efficient electronic means for order-entry firms to route customer orders to specific market makers on Nasdaq, streamlining the order submission and confirmation process.
Is ACES still in use today?
While the original Advance Computerized Execution System (ACES) as a central Nasdaq order routing and execution component has evolved significantly and its direct execution function was phased out, the principles of automated order routing and electronic communication it pioneered are fundamental to modern electronic trading systems. Modern market infrastructure largely replaced systems like ACES with more sophisticated platforms.
How did SEC rules impact ACES?
New order handling rules introduced by the Securities and Exchange Commission (SEC) in 1997 significantly impacted ACES by requiring market makers to display customer limit order prices. This reduced ACES's role in automated execution and pushed market makers to manage their quotes and orders more directly within their own systems to ensure compliance.1