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June 30, 1998

For Your Eyes Only: In Undercover World of Intelligence Agency Desks Utilize New Technology

By Michael L. O'Reilly

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  • For Your Eyes Only: In Undercover World of Intelligence Agency Desks Utilize New Technology
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On Wall Street, firms guard intelligence secrets with a passion rivaled perhaps only in international espionage.

But the programmers and scientists guarding the secrets of so-called intelligent trading systems more closely resemble James Bond's pal Q the brainy inventor of 007's electronic gadgets than they do the British secret agent.

Since their introduction into Wall Street in the late 1980s, intelligence systems have made significant inroads into proprietary trading. Employing mathematicians and physicists, certain firms have used the systems based on mathematical models, or algorithms, that help process information and recognize patterns to locate mispriced securities and project future stock movements.

But recently, a number of trading firms have used intelligence software to trade stocks on an agency basis.

"Agency trading will have to go this way," said Dr. Mark Gimple, managing director of quantitative methodologies at New York-based Reynders, Gray & Co., an institutional agency-trading firm. "Investors are looking worldwide for liquidity, and they will need that technology to find it."

Gimple a Stanford University Ph.D. and former aerospace and biomedical scientist developed his firm's distinct intelligence system. With initial start-up costs of more than $400,000 for equipment and software, it took Gimple six months to get the trading system running.

Aimed at lessening market impact, the quantitative trading system is programmed to follow the daily volume in New York Stock Exchange-listed stocks. The system equipped to trade up to 6,000 client orders each day will trade for orders when a particular stock's volume is peaking during the day.

The system does not handle Nasdaq orders. "Because of the nature of the dealer market," Gimple said, "Nasdaq orders require a little more human attention."

Affectionately nicknamed "the walking algorithm" by his co-workers, Gimple said the system keeps track of multiple liquidity sources and accurately projects when volume in certain stocks will rise.

When the desk receives an order from a client at a pension fund, trust fund, institution or from a broker, Gimple or a Reynders Gray trader will give the client a first assessment of the market, hoping to get a sense of how the client wants the order to trade. Some orders may need to trade quickly, others can be stretched out over days. Based on the client's instructions, the desk will enter the order for execution within a certain time frame.

The desk then enters the order into the system, providing the system with a designated price range and time frame for execution. The system will execute an order within the designated parameters when it predicts volume will peak.

"We call it trading in the shadows,'" Gimple added. "We try to be present in the market, but we don't want our orders impacting the marketplace."

When the system determines an order should be filled, it will be sent to the NYSE's DOT system if it is a market order, or to SuperDOT if it is a limit order. The Big Board's electronic systems, in turn, route the orders directly to the specialist for execution.

Reynders Gray has eight equity traders in New York and Boston. Of the 1.5 million shares the desks average each day, almost half are executed by the trading system.