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March 1, 2001

The Basket TradingTechnology Boom: Young Turks Pledge Faster Basket Executions

By Peter Chapman

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  • The Basket TradingTechnology Boom: Young Turks Pledge Faster Basket Executions

A group of upstarts is using advanced technology to give traders more choices than ever to execute multi-security baskets.

At least five technology shops now offer products they say make basket trading easier, faster, cheaper and more sophisticated. Three have popped up in just the last three years. Four are operated by discount brokers. One is a software publisher that charges for its services in the same way as a broker.

All of the providers have one goal in common: To take market share away from the established Street program desks or help those desks trade their own orders.

The boomlet in technology coincides with the boom in demand to trade 20, 100, 500, or even thousands of stocks at one time. Users are quantitative traders, indexers, and arbitrageurs. They work for hedge funds, mutual funds and on brokerages' program and proprietary desks.

A basket is a group of buy or sell orders. Each order might represent 100 or 10,000 shares of a stock. There might be 20 orders in a basket or 2,000. Total principal ranges from $2 million to several hundred million dollars.

In the bad old days of the 1980s, when triple witching hours and circuit breakers made the headlines, basket trades were reviled as agents of market disruption. They were called program trades. To some extent regulators eventually tamed the computer-driven strategies. Now volume is exploding.

Basket trades have accounted for nearly 25 percent of all shares traded on the New York Stock Exchange so far this year. That's up from 19 percent a year ago. In one week last December they equaled one third of NYSE volume. At the American Stock Exchange, demand for its exchange-

traded funds, has rejuvenated the wilting bourse. Retail investors can even buy and sell small baskets through e-brokers like Folio[fn].

Most basket trading is done by the pros. Traders at mutual fund companies who manage funds that mimic the performances of the major indexes, such as the S&P 500 or the Russell 2000, must buy and sell huge baskets. Periodic rebalancings, or portfolio adjustments necessary to stay in sync with changing index components, require big basket trades as well.

Hedge funds and quant shops often run sophisticated strategies that track market sectors or involve stocks with similar or dissimilar characteristics. They too need to trade whole groups of stocks at one time.

Arbitrageurs, who go long cash equities and short the relative index future, or vice-versa, must move huge quantities of securities to profit. They need speed, throughput and reliability. Even plain vanilla money managers faced with large dollops of cash flowing into their relatively constant portfolios are players.

Here are five shops that either move baskets themselves or make it easier for full-service brokers and institutions to do so.

Bloomberg TradeBook

The electronic agency broker has the newest product on the scene. TradeBook came out with its List Manager basket trading system last year. The technology falls somewhere in between the simple list managers built into order management systems (OMSs) and the high-end complexity of ITG's QuantEX.