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January 1, 2005

Trading Across the Pond

By Nina Mehta

ECNs are now a tool of the trade in the U.S. But forget about

Europe. "In Europe, ECN-type systems are less important mechanisms of liquidity in the market than they are in the U.S.," says Alexandre Drabowicz, who runs the trading desk in Paris at Systeia Capital Management. "Here, people trade on the electronic platform of the exchange."

Trading in continental Europe's 13 equity markets is regarded as fully electronic. Still, locating and seizing liquidity can be a challenge. For example, on Euronext, which offers trading in Dutch, Belgian and French stocks, daily volume may be high but the size available on a screen tends to be small. In contrast, the London Stock Exchange is a hybrid affair. It has an electronic order book but remains a largely upstairs market, says Drabowicz.

Systeia is a group of five hedge funds with $1.5 billion in assets. The subsidiary of Credit Agricole Asset Management was founded four years ago. Drabowicz and two other traders execute orders for the firm's statistical arbitrage fund and a managed futures fund. Systeia's statistical arbitrage fund trades about 70 percent of its volume electronically. One reason, Drabowicz points out, is that the fund, which encompasses two mean-reverting strategies, has grown fivefold since it was launched. That, coupled with a high rotation - the portfolio turns over about 40 times per year in trading volume - requires greater focus on market impact.

Last April, Systeia began using FlexTRADER, a broker-neutral trading platform and OMS. The hedge fund wanted a flexible system that would let it design and implement its own "dilution-type" trading rules. "When executing an order over two hours, we may base our volume distribution on the stock's historical daily volume distribution, on the stock's average volume distribution over the last 20 days, or the volume distribution of the sector to which the stock belongs. Or we could do a random distribution," says Drabowicz. For orders requiring execution over an hour or two, he adds, the random algorithmic strategies tend to be more efficient. Although the European markets have become more efficient in the last few years, Drabowicz would like to see more reform to augment liquidity on electronic platforms.

The U.K. market represents about 40 percent of Systeia's trading. "We would love to trade 100 percent of the U.K. market electronically, rather than having to go to IOIs [indications of interests] and find the upstairs liquidity," Drabowicz says.

Drabowicz would also like Euronext to encourage larger-size trades. The exchange's iceberg, or reserve, functionality can be an "impediment to liquidity because people play a cat and mouse game," he says. "On Euronext you can buy 100,000 shares 20 at a time. That's ridiculous." Drabowicz believes Euronext should put some strictures around iceberg orders. On Xetra, the German electronic market, an investor can place an iceberg order but must release 1,000 shares or 10 percent of the order into the market at a time. "It's an iceberg order with constraints that make the order more tradable in the market for size," says Drabowicz. "That brings liquidity without showing too much liquidity to the market."

Although 90 percent of Systeia's trading is in European securities, 10 percent is now in NYSE-listed stocks. "It's a big market with big liquidity, but people are scared to show size and everyone struggles to execute their trades," says Drabowicz, who began trading listed stocks in October. "I think - and not because I'm European - that the structure we have in Europe is more transparent."