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April 30, 2003

Adieu to Single Stocks

By Editorial Staff

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Program trading has come of age.

Using sophisticated computers to spew hundreds of precisely timed orders into the market isn't just for an elite cadre of quants, indexers, arbitrageurs and prop desks anymore. It's gone mainstream. Regionals and second tier brokerages are establishing program desks. Plain vanilla buyside shops are reorganizing their workflows - away from single stocks towards baskets.

Statistics from the New York Stock Exchange show programs now account for about 37 percent of all Big Board executions. That's up from 27 percent a year ago. Vijay Kedia has had a front row seat on the action since 1996. That's when the former electronics engineer left Bear Stearns' program desk to set up FlexTrade Systems, a vendor of program trading software.

Kedia believes the sky is the limit for program trading. Almost any desk engaged in single stock trading can benefit by grouping its orders into baskets and building trading strategies around those baskets.

That's not just a vendor's wishful thinking. Banc of America Securities, for instance, has made program trading the heart of its revamped (and relocated) equity trading operation.

Kedia has built FlexTrade into the dominant vendor of program trading software. It is one of the few non-brokers supplying the technology and recently landed one of the largest fund managers, Barclays Global Investors, or BGI.

FlexTrade, which is based in the New York suburbs, has a staff of 30 and more than 70 customers. Customers are evenly divided among hedge funds, traditional buyside and the sellside. Traders Magazine's Peter Chapman recently caught up with Kedia.

Traders Magazine: In 1996, why did forming FlexTrade seem like a good idea?

Kedia: In a word, FIX. At that time, FIX was just talk. It had just come out of the gate. As with any new protocol the chance of success are slim. But I felt it was a good way to create a platform where everyone could talk to, or trade with, everyone else. As a common way to speak to all the brokers.

Traders: How was the buyside trading programs in 1996?

Kedia: In those days...Let's say a buyside trader had to trade with ten brokers. Each of those brokers would give him a system. He would have a system from Merrill, from Salomon Smith Barney, from Bear, etc. So, if they had a program to trade they would actually have to fragment it into ten boxes and trade individually with each of the ten brokers.

Traders: Brokers would sell or give out proprietary systems?

Kedia: Yes. Bear used to sell or give its own system to the buyside. That way they would capture the order flow. It would not go anywhere else. Some of the larger brokers in those days had their own platforms. The limitation was you could only trade with the broker who gave you the platform. That was a huge limitation.

Traders: FIX changed all that?

Kedia: FIX allowed me to create a system where, through one platform, you could seamlessly trade across all the brokers.

Traders: Your original customer base was pretty sophisticated.