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Tim Quast
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May 31, 2003

Program Trading Prospers: Quietly, Traders Become Techies in Game of Computers

By Desmond MacRae

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  • Program Trading Prospers: Quietly, Traders Become Techies in Game of Computers

Program traders are now techies. That's regardless of whether they under stand it or not. Robert Hegarty, head of TowerGroup's securities and investment practice, says program trading is increasingly accepted because of technological advancements.

"There is a growing number of tasks that buyside traders routinely perform to make buy and sell decisions that rely 100 percent on computer programs," he said.

Even portfolio managers are running portfolios through models to determine what they should buy and sell.

"Everyone knows that the concept of technology is simple," said Manny Santayana, a trading pro at Credit Suisse First Boston in New York who specializes in program trading. "It's all about moving the power of trading upstream into the hands of end-users hands."

Electronic trading has revolutionized the entire culture of CSFB, and Morgan Stanley as well. "The smart brokers are giving tools to the buyside customers so that we can give them commission reductions," Santayana said. "If you give the power of the trade to the end user so they can do trades themselves, you can actually make more money."

Many dealers now believe that buyside traders - especially program trading oriented buysiders - come out on top when they take more control of the trade with electronic tools. Volume from value-added services - like security analysis, market read or capitalization trading - should not be impaired at all by electronic cash or program trading order flow, trading experts say.

"My buyside customers are telling me that both CSFB and Morgan Stanley are at the forefront of service delivery to buyside program traders," said Mark Enriquez, chairman of Pulse Trading, Inc., an institutional electronic agency broker in Boston, Massachusetts. CSFB is giving traditional buyside traders and program traders tools in a package that combines algorithms for order management with smart order routing. Morgan Stanley has a similar package.

Two of the most talked about elements for successful buyside trading are liquidity and anonymity. But there are other critical elements. "They are productivity, reliability, versatility, quality results, and ease-of-use," said Santayana.

At the same time, the recent bear market has caused portfolio managers to look more carefully at trading performance numbers.

Still, there is some confusion among pros. "A lot of people confuse program trading with basket trading," said Hegarty of TowerGroup, which is based in Needham, Mass.

Program trading is executing set trades that will accomplish a specific objective, often called a "program." Computers are often used because the algorithms - that define the "programs" - are obviously complex. This approach usually speeds up executions. Fair value arbitrage of the S&P500 futures, versus an S&P500 cash index replication using some 10 percent of the underlying stock, is a relatively simple example.

This is classical arbitrage - the simultaneous buying and selling of the same goods in different markets at the same time for profit. "The program trading that buyside traders use might better be called basket trading," Hegarty said.