Rob Daly
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OPINION: CAT NMS is Out of Options

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April 30, 2003

Adieu to Single Stocks

By Editorial Staff

Kedia: You could take it a step further. Say I want all my sectors to maintain the long-short ratio. As you are trading you don't want to introduce market risk into the platform. Since you have both buys and sells working in tandem. Whether the market goes up or down you are not so exposed to it.

Traders: Continue...

Kedia: Let's say you did not have this smart strategy on the system. Let's say all your buys were the easy names. You bought them right away in the morning. The sells were the tough names. You must trade them throughout the day. Now your portfolio skews.

It becomes much more exposed to the market. So, here's an example where you are trading a program, but at the same time using a strategy to control the trading. That's what I mean when I say it goes beyond beyond slicing and dicing.

Traders: So, you instruct the system to maintain the ratio. It knows not to buy too much or sell too much.

Kedia: Or, if you buy too much, then it can hold on to the remaining buys until the sells equal the buys.

Traders: Trading boils down to price, quantity, timing and destination.

Kedia: Right. But over the past two or three years there has been too much hype about smart routing. My view has always been that smart timing' is many, many times more important than smart routing. What you are trying to save with smart routing is a very small fraction of what smart timing can offer. Those who use the system recognize the value of smart timing along with smart routing.

Traders: Will program trading completely replace single stock trading?

Kedia: No. There is a place for both. Even though you are trading programs you can still focus on individual stocks. But still look at the program as a whole. In other words, you still want Microsoft to trade the way it would if you were trading it individually. The only difference is a single stock trader is only worried about that one stock. But there is no reason to lose that focus if you are trading a basket. And the added constraints at the basket level give you more control over your risk and performance.

Traders: If I am used to trading Microsoft manually... ?

Kedia: You have certain expertise.

Traders: Which I won't lose if I dump it into a basket?

Kedia: If you are trading a basket you don't have to compromise that expertise. You can implement it at the program level. Even though you are trading a program you are still ultimately trading individual names.

Traders: Turn my expertise into an algorithm?

Kedia: Absolutely. Because ultimately you are trading individual names.

Traders: So everyone trading single stocks now would be better off trading baskets?

Kedia: Yes. But they won't lose the expertise required to trade individual stocks.

Traders: So, we'll still need humans. That's a relief. Thanks Vijay.

Kedia: My pleasure.