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August 23, 2005

CSFB Under Siege: The Algorithm King Defends its turf

By Peter Chapman

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  • CSFB Under Siege: The Algorithm King Defends its turf

(Traders Magazine, August 2005) -- Last month's announcement by Lehman Brothers that it had struck a deal to integrate a pre-trade analytics package into one of the leading buyside order management systems was not the best of news for Credit Suisse First Boston. The unit of the large Swiss bank-which single-handedly developed the mass market for algorithmic trading and whose name is synonymous with algorithms-is at least a few months behind its bulge-bracket competitor at the pre-trade front The lag underscores the dilemma in which CSFB finds itself.

Despite its status as the king of algorithms, CSFB is now under considerable pressure to stay ahead of the pack in offering electronic trading services to money managers.

"No one is going to give you an order because you were first," Dan Mathisson, co-head of CSFB's Advanced Execution Services (AES), says. "There is enormous pressure to innovate."

In 2001, CSFB was the first bulge-bracket player to aggressively push algorithmic trading as an antidote to the difficulties of trading stocks following decimalization. The firm, a top 10 trading house based on traded shares reported to AutEx Blockdata, dominated the landscape for the next two years.

Everything is different now. Every one of the top 10 or 15 investment banks is furiously churning out computerized trading tactics and analytical products, hoping to hold onto the order flow of their increasingly sophisticated clients.

For Lehman's top electronic trading executive, Jeff Wecker, getting content such as pre-trade analytics onto the desktops of the buyside, "is what will separate the leaders from the followers" in electronic trading.

Those are certainly fighting words.Yet CSFB is undaunted.

"Being first has given us enormous advantages," Mathisson said. "We have the most mature and reliable system. We've hit all the problems you can hit over the past four years. We've had time to refine our procedures, our processes and our technology. We've been able to improve our trading logic."

To that end, AES has been able to reduce both the number of milliseconds its systems take to execute an order as well as the average number of shares in an individual order. Routing time has decreased from 180 milliseconds to between 12 and 20 milliseconds. The average order size is down to 230 shares from 300 previously. "Smarter, faster, cheaper," Manny Santayana, co-head of AES, says. "That's the goal."

Improving its existing programs is one of three goals in CSFB's drive to maintain its edge. The others include devising new products and customizing algorithms for clients.

"Customization is becoming a significant percentage of our business," Mathisson said. "Clients know how they want the algorithm to behave." To that end, a CSFB crew will call on a customer to determine his trading goals and then propose a solution. The CSFB team includes a sales person, a trader, a quantitative analyst and a programmer.

For the record, CSFB's core algorithm menu consists of five different tactics. It has programs that achieve VWAP and TWAP; one for minimizing implementation shortfall; another for matching the price of the stock at the time the order was entered; and one for beating the closing price.