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March 23, 2005

Flooding the Buyside With Algorithms

By Peter Chapman

Learn to live with algorithms because more are on the way. That's the sellside's message to a buyside community wary of these math marvels.

Almost every broker with an algorithmic trading engine has distribution deals with vendors that sell desktop systems to the buyside. Access to algorithms is available through order management, trading and market data systems.

Actually, the phenomena of broker-vendor integration triggered the early surge in algorithm usage in 2002. That's when algo pioneer Credit Suisse First Boston partnered with Bloomberg, making the tools of CSFB's Advanced Execution Services desk available to Bloomberg's buyside users.

Since then, other brokers with algorithms have flocked to Bloomberg, hoping to make their servers accessible over the popular market data front-end. Bloomberg now lists algorithms from 20 different brokers including CSFB, Banc of America, Deutsche Bank, Goldman Sachs, J.P. Morgan Securities, Lehman Brothers, Merrill Lynch, Morgan Stanley, Sanford C. Bernstein, and UBS.

Not to be outdone, Bloomberg rival Reuters recently signed distribution agreements with seven brokers. The algorithms of BofA, Deutsche Bank, Goldman, J.P. Morgan, Lehman, Merrill, and Morgan Stanley are now accessible to buyside traders using Reuters' desktop offerings. The seven join existing brokers already on Reuters' shelves: CSFB, Instinet and Bridge Trading.

Among the order management vendors, Macgregor, one of the largest, may offer the most extensive collection of broker algorithms. Goldman Sachs, BofA, CSFB, J.P. Morgan, Lehman, Merrill, Morgan Stanley, Bernstein, UBS and Weeden & Co. all occupy shelf space on Macgregor's XIP system.

Brokers aren't just relying on vendor systems for distribution. At least two have tapped other broker dealers as resellers. Both Banc of America and CSFB are working with smaller brokerages to offer the algorithms to clients. The arrangements benefit small and mid-tier brokerages that may not have the wherewithal to develop and maintain their own algorithms. BofA has already landed CIBC for its new service.