Everyone loves an

underdog. On Wall Street, that's paying off for


and its


electronic trading system.

In the latest bout of defections to this off-Wall Street player, MarketXT has landed several top managers from competitor


, a



unit, MarketXT confirmed.

The hires will enable Tradescape and MarketXT to stretch from their focus on trading by retail investors to the next level of trading -- institutional investors. Instead of just investors making orders as small as 100 shares, they'll also target the buyers and sellers of blocks of 100,000 shares and more, as well as the steady flow of business those firms provide.

A New Team

Tradescape is expected to announce Monday that it hired John Palazzo and Scott Graczyk earlier this summer to head up MarketXT's push into the institutional market this fall. Palazzo and Graczyk were co-heads of Instinet's global sales and account management. Instinet officials weren't available to comment.

Tradescape also hired Tony Pellicci, formerly the head of Instinet's clearing business, to head up its clearing business as MarketXT starts handling its own back-office operations for big institutional customers. Currently,



handles clearing, or trade execution, confirmation and other record keeping, for MarketXT.

Other new hires include two developers from Instinet, Charles Susi, who was Instinet's head of product strategy, and Bruce Smith, who worked on electronic connectivity. Both will fill the same roles at MarketXT.

A Shift

The hiring spree is about more than Wall Street execs moving to a small firm. It's about a business built on the surge of retail investing and daytrading, or the rapid buying and selling of stocks, during the past few years now turning to the steady revenue stream of institutions.

Other start-up Wall Street firms have also had to make this change in order to continue growing their businesses.

Wit Capital


, for instance, started as the little guy's online investment bank but then acquired


, a more traditional investment bank whose clients included institutions.

MarketXT began as a company for outsiders. Its initial mission -- and the way it's described on the Web site -- was to be a place for individual investors to trade after hours. The site took a while to build though, and when it finally started running, other trading systems like

TheStreet Recommends

Datek Online's Island

had eaten into the after-hours market. Since then, MarketXT has struggled to gain market share. By the time Tradescape agreed to buy MarketXT in February with the help of backer


, it had become an also-ran. The deal closed last week.

Another Chance

The new team of hires could breathe life into this business, giving Tradescape enough breadth to stand on its own despite stiff competition. That means not only providing a front-end trading system, but also using the firm's order-routing technology to send orders to other ECNs, or handling the executions on the MarketXT ECN then doing the clearing, or back-office work, for its customers. In other words, Tradescape believes it's building a complete package.

"Whether it's a JV or an acquisition or doing it ourselves, we have the right person to run all of our clearing operations," says Omar Amanat, Tradescape's CEO.

That move could have ramifications for Tradescape's retail business, which includes two retail trading firms aimed at active traders,

Tradescape.com Securities


Momentum Securities

. Both have a longstanding clearing agreement with

Southwest Securities


, the Dallas broker-dealer that's lost two large customers this year. (



written about Southwest previously.)

No Decision

Amanat says no decision has yet been made about moving the retail clearing business -- the firm's contract with Southwest was up in August and last month Amanat said he was looking for a low-cost solution. One possibility is moving that clearing business to Datek.

"Basically we have not made any decisions on that side. It's not a high priority for us to take that self-clearing," he says.

What is taking priority is MarketXT's careful move into a marketplace already crowded with other electronic trading players that cater to institutions. In addition to Instinet,

Bloomberg Tradebook



, which is owned by a consortium including Instinet and

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report

, have found a niche with that crowd. Island has also been trying to grow its institutional business.

So far, there are no reports of MarketXT scooping up any institutional clients from those competitors. But with Instinet unwittingly behind MarketXT (even its chairman and chief executive has Instinet on his resume), that may not be the case for long.