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Jared Dillian
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The Great Rebalancing

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March 1, 2001

The Basket TradingTechnology Boom: Young Turks Pledge Faster Basket Executions

By Peter Chapman

FlexTrade does supply a "very basic VWAP engine," according to Wolyner, but encourages clients to use their brokers' systems. A VWAP engine allows traders to feed orders into the market in slices over the course of the day - thus the term time slicing' - in order to match the volume-weighted average price of the day. Many brokers make their own VWAP engines available to clients. Wolyner says FlexTrade is working with a number of big brokers, including Morgan Stanley, to make their VWAP engines accessible through FlexTrade.

Because it is strictly a software vendor FlexTrade is not privy to the trading strategies or the volume generated by its clients. Users install the system on their premises, use the software to automate their strategies and keep the results to themselves. "If we've done our job right you are able to write your own rules and do your own thing," Wolyner said. "That's our goal."

ITG

ITG's flagship product for trading baskets is QuantEX. It has been around since the late 1980s and has waged a fierce battle for traders' wallets with FlexTrader since that system's debut in 1997.

Like FlexTrader, QuantEX is a rules-based auto-trading mechanism. It manages orders, monitors positions and the market, and automatically executes trades. There are a few key distinctions between the two, however. Rather than train customers to write algorithms, as does FlexTrade, ITG does the work itself. Its customers receive customized versions of certain standard trading techniques, such as index arbitrage or pairs trading.

Most of its clients tend to be traders, and not programmers, who require the assistance, explained Scott Harrison, product manager for QuantEx and its sister product ITG Platform. "Clients deliver ideas to us and we deliver products to them," he said.

Another point of departure: ITG is a broker whereas FlexTrade is a software publisher. ITG handles all the routing links for its customers. Users of FlexTrader must manage the connections themselves.

Harrison says a fundamental difference between the two is that QuantEx functions as a "true" portfolio trading system. He considers FlexTrader more of a single stock trading system. "QuantEX does real portfolio analysis instead of only operating on a per-stock basis," he noted. "QuantEX has a broad understanding of the portfolio as an entity, as an object itself."

Harrison concedes FlexTrader's relative newness makes it easier to program in.

Most QuantEX customers are on the buyside. Quants predominate. (Well, it is called QuantEx.) Indexers prefer to use ITG Platform, a plainer stripped-down version of QuantEX, according to Harrison. ITG Platform runs on Microsoft's Windows while QuantEX operates in the UNIX environment.

"They're less concerned about price performance," Harrison said. "Whereas the arb guys are focused on getting the best price as fast as possible." Harrison did not provide details of execution speeds.

All clients pay a per-share commission of from three cents down to fractions of a cent. Harrison says three cents is rare, but may be charged if ITG is doing all the customer's clearing. QuantEx had 50 users at the end of 1999, according to an ITG filing with the SEC.