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August 31, 2000

CooperNeff's Bid For Blind' Business Quant Shop Using Technology for Growth

By Peter Chapman

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  • CooperNeff's Bid For Blind' Business Quant Shop Using Technology for Growth
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Quantitative trader

CooperNeff Group is crossing the Street to make markets in baskets for institutions. Its plan is to use technology to differentiate itself from such entrenched competitors as Deutsche Bank Securities and Lehman Brothers.

CooperNeff, a subsidiary of French banking behemoth BNP Paribas, is one of the largest basket traders on Wall Street, but little known outside of a select circle. Nestled inside a suburban Philadelphia office park, it uses sophisticated software and mathematics to trade for its own account, accessing the market through sister company, BNP Securities.

It recently formed a broker dealer unit called Enhanced Portfolio Strategies (EPS) to bid, on a principal basis, for the multi-security basket trades of large institutions. In so doing it joins a handful of big investment banks which trade proprietarily and also bid for the portfolios of others.

Deutsche Bank and Lehman are reportedly the most aggressive program traders while Salomon Smith Barney, Goldman Sachs and Morgan Stanley Dean Witter make up the second tier. Merrill Lynch also offers the service.

Institutions typically buy and sell large baskets of securities when "rebalancing" portfolios to match changes in a stock index or shifting money between money managers. Seventy percent of the stocks are New York Stock Exchange names; the balance is in Nasdaq issues.

Approximately 70 percent of those trades are done on an agency basis, according to industry sources. The balance is bid blind (the market maker doesn't see the securities unless he wins) on a principal basis. That's the business CooperNeff intends to enter.

To run EPS, CooperNeff signed Mony Rueven and three others from renowned quant shop D.E. Shaw. Shaw folded Rueven's operation and sold certain assets to Knight Trading Group in February. A big player in the blind bidding game, Shaw's presence has been missed for at least a year, buy-side traders say. They hope CooperNeff will fill that void.

Senior managing director Robert Cavallaro oversees EPS. He says the decision to make markets was made out of a need to access liquidity above and beyond that which is available in the open market.

More trading is taking place "upstairs," leaving less liquidity on the NYSE and Nasdaq for CooperNeff. Large baskets of listed stocks are crossed after-hours and overseas while huge quantities of Nasdaq stocks are crossed internally at wholesalers like Knight.

"This order flow never makes it to an established exchange," Cavallaro said. "It's usually printed on a crossing session or after-hours. You can't get it just showing up on the floor of the New York Stock Exchange."

Market structure changes have also turned the environment increasingly hostile to large trades. The switch to trading in sixteenths, for example, has reduced the size of the typical trade as well as the size quoted by market makers and specialists, according to Cavallaro. That makes it much harder to get a large block done. Decimalization will only exacerbate the situation, Cavallaro believes.