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July 31, 2003

Survival in the Age of Decimals

By Peter Chapman

Also in this article

Banc of America's New Location, Formula and Trading Floor

Banc of America Securities, in a bid to cope with decimalization and cost conscious customers, is arming its block traders with program trading technology.

The subsidiary of the nation's second largest bank is supplying them with sophisticated algorithmic tools - tools that were once the sole province of quantitative traders.

"We strongly believe in technology solutions and algorithmic trading for the cash business," said Peter Forlenza, BofA's global head of cash equities. "Period. Full Stop. From front to back."

BofA's goal is to increase the efficiency of its equity trading operation in order keep down both its costs and those of clients.

Behind the move is the harsh reality of market structure since decimalization. Spreads have shrunk. That has not only cut into revenues, but dramatically reduced displayed liquidity.

The disappearance of sizable quotes has made it much harder to execute large blocks without impacting the price. Yet, the buyside still expects fills at appropriate levels and is paying closer attention to its implicit trading costs.

Banc of America Securities, which recently moved from San Francisco to New York where it rebuilt its trading floor, is not the only institutionally-oriented trading operation bringing algorithms to its block desk. But the all-encompassing nature of its plan speaks to the wiliness and sophistication of Wall Street in dealing with a radically changed market structure.

To shape its next generation trading team, BofA made two key moves. First, it hired Forlenza, formerly in charge of European trading for Citigroup and, more to the point, the one-time head of Citigroup's worldwide program trading business. Forlenza, whose responsibilities at BofA include sales, sales trading and trading, may be the only ex-program trader to head a major cash equities operation.

Second, BofA bought Vector Partners, a quantitatively driven broker dealer based in Norwalk, Conn., which catered to hedge funds. Based in the heart of hedge fund country, Vector offered heavy-duty program trading tools to heavyweight money managers.

BofA's plan is to transfer as much as possible of Vector's trading and analytics prowess to its staff of 39 block traders and assistants. The increased automation is intended to keep BofA's headcount down and let traders more precisely navigate the choppy waters of the marketplace.

To date, the acquisition of Vector has mostly translated into the creation of BofA's program trading desk. Twenty-four traders and technologists switched their commutes to Manhattan from Norwalk.

The Tools

But algorithms built to handle some of the more intensive trades are making their way to the BofA's block desk. Tools for VWAP orders, percent of volume orders, stock buyback orders and 144 sellers are already in production on the block side, according to BofA execs.

More sophisticated tools are slated for introduction. Crucial to making the leap from plain vanilla to state-of-the-art is the integration of BofA systems with Vectors.

To that end, BofA snatched Raj Nagella from Goldman Sachs. Nagella is in the process of introducing the Vector algorithms to BofA's block traders.