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January 1, 2005

Algorithms Are Coming to More Brokers and Buyside

By Peter Chapman

Two of the Street's biggest algorithmic trading houses are battling each other for broker dealer order flow.

Banc of America Securities and Credit Suisse First Boston are offering algorithms - once only available to their institutional customers - to other broker dealers. BofA is marketing its proprietary EASE algorithms under the Algo-Connect banner. CSFB is offering derivatives of its AES algorithms under its Broker Dealer Plus program.

Both shops are pioneers in the application of computerized trading to the order flow of traditional money managers. As decimalization has made the sourcing of large blocks difficult, brokers are using computers to parcel out large orders into smaller pieces.

Under the initiatives, the two competitors are targeting small and mid-sized brokers that have institutional customers. The thinking is that many brokers want to offer algorithmic trading to the buyside, but lack the resources to develop the technology.

Banc of America is claiming a big win: CIBC World Markets, a top 20 player as ranked by AutEx/BlockDATA. Here's how the BofA/CIBC arrangement works. CIBC's customers' orders are sent to BofA's servers, where they are broken up by an algorithm and sent to a trading venue. CIBC's name is given up in the trade. BofA then delivers reports to CIBC's customers. BofA and CIBC split the commission.

BofA is aware of the identity of the CIBC client, according to Rob Flatley, a BofA exec. But that knowledge does not threaten CIBC's relationship with its customer. "We are not the clearer," Flatley explains, "so there is no dis-intermediation." CIBC executives declined to comment on the deal.