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April 30, 2000

Faster Trade Measurement

By Peter Chapman

Also in this article

A group of agency brokers is introducing faster and more sophisticated cost measurement technologies for the buyside.

The technological breakthroughs, coming as money managers face increasing pressure to contain costs, are rocking the industry, forcing a leading industry vendor to revamp its business model.

At the forefront of the new technologies are Reuters Group's Instinet, ITG and Abel-Noser, a small discount broker based in New York.

Each firm is releasing software that enables traders to measure market impact, timing and risk before and after trade execution. The measurement is on a real-time basis by ITG, and on an overnight basis by Instinet and Abel-Noser.

That's a major change. Today, it can take about three months for a desk to receive a cost breakdown from some measurement firms.

The agency brokerages, which are not driven by profits in proprietary trading, have provided plan sponsors and money managers with transaction cost analysis for years. Their hope is that the results they promise will convince clients to trade with them on an agency basis, foregoing principal trades with other firms.

The competition in cost measurement is likely to become intense, sources say. MacGregor Group, the leading vendor of buy-side order management systems, is rumored to be building transaction cost analysis capabilities into its Predator system. MacGregor wouldn't comment. Predator is used by about 80 buy-side desks.

Propelling the competition is the need by money managers for faster feedback. Institutions are under increased pressure to control their trading costs.

They operate in a market in which their competitors are within a few basis points in the performance rankings. Plan sponsor clients are demanding information on how their commission dollars are spent.

Another factor prompting a demand for faster and more sophisticated reporting is the Securities and Exchange Commission. The SEC is said to be taking a harder look at the execution costs of mutual funds.

"With quarterly reports, you obviously have to wait a considerable amount of time before you can see a pattern established," said Mary McDermott-Holland, head trader at Boston's Franklin Portfolio Associates. "And you can't just fire your broker [for poor executions] based on one quarter's worth of data."

Franklin decided it couldn't wait for a vendor solution. The mutual fund company is working with a sell-side firm to develop a proprietary cost measurement system accessible on a next-day basis.

Pioneer Faces Challenge

Franklin is one of 90 customers of the Plexus Group in Los Angeles. Plexus is a pioneer in the pseudo-scientific business of measuring transaction costs. But it has been slower than competitors to adopt its consultancy model of business, observers say.

Plexus chief executive Wayne Wagner concedes the pace of technological change is dramatically increasing.

"[Faster turnarounds] are clearly necessary and clearly coming," he said. "Paper isn't going to cut it anymore."

Wagner insists Plexus is on the right track. It plans to allow institutions to access its measurement system whenever they want. "We are now moving toward a real-time application of PAEG/L," said Wagner, referring to Plexus' cost measurement product. "We're taking the whole system online," he added. "We'll get our share [of the business]."