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December 1, 2004

The Algorithmic Aggregator

By Peter Chapman

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Lava Trading did it with ECNs. Could Electronic Specialist, a direct market access brokerage, do it with algorithms? Back in 1999, Lava introduced an ECN aggregation product called ColorBook. The software combined all of the books of the major Nasdaq trading venues together onto one screen. Sellside traders could finally get a complete picture of the fragmented Nasdaq market. Lava became a huge success.

Now, as a flood of algorithmic trading models pour out of brokers' cash equities departments, buyside traders are facing a new kind of fragmentation. To which model do they send their orders? How do they compare across platforms? Is every VWAP algorithm the same? Is every arrival price model?

Electronic Specialist, a three-year old firm based in New York, has come up with its own solution. EARN - an acronym for Electronic Algorithm Routing Network - aggregates the algorithms of seven major broker dealers onto each of seven major trading platforms used by the buyside.

The Electronic Specialist product is similar to some others offered by vendors servicing the buyside: It centralizes brokers algorithms onto one console. A few critical differences, however, make it unique, according to the company.

Bloomberg and some order management system vendors let traders access broker algorithms through their systems. But under those arrangements, traders must be customers of the sponsoring brokers to win access to their models.

Under the Electronic Specialist program, users need to be customers of Electronic Specialist only, and not of the sponsoring brokers. Its customers can access any of the algorithms offered by the seven brokers on an anonymous basis.

Electronic Specialist is the second broker dealer founded by twin brothers and ex-hedge fund traders Robert and David Sher. The first was called ElephantX, an electronic specialist operating on the National Stock Exchange.

In late 2001, following the demise of ElephantX, the Shers set up Electronic Specialist to offer buyside traders DMA software and electronic access to various trading venues. With EARN, the broker algorithms are simply seven new trading destinations.

ESP's customers total about 150 institutions. They are hedge funds, quantitative asset managers, life insurance companies, self-directed pension funds and mutual funds. Traders Magazine technology editor Peter Chapman sat down with Scott Kurland, a senior managing director of Electronic Specialist, to discuss EARN.

Traders: Which brokers make their algorithms available to your network?

Kurland: Credit Suisse First Boston, Vie Securities [now owned by Piper Jaffray,] BNP Cooper Neff, Banc of America Securities, and Merrill Lynch. Two others are in beta that I can't disclose.

Traders: You sponsor 17 different DMA front-ends. Through which ones are the algorithms accessible?

Kurland: That's Portware, Flextrade, InfoReach, Neovest, Sterling Technologies, Real Tick and our own FIX Direct Engine.

Traders: Why develop EARN?

Kurland: Our large, more traditional customers drove EARN. They had three major requests. They wanted to access algorithms anonymously to minimize market impact. They wanted to streamline the administrative and clearing process. And they wanted the ability to gauge and benchmark these strategies.

Traders: Traders get anonymity?

Kurland: When we deliver orders to any of these desks, they go unattributed. The desk does not know the end customer. It only sees orders from ESP. And then the orders are cleared on a broker-to-broker basis against our clearing firm.