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September 12, 2006

Buyside Looks to Bypass Bulge-Bracket Algorithms

By Peter Chapman

Weeden & Co., in a unique undertaking, is partnering with an independent software developer to install algorithmic trading servers on some of the Street's largest buyside desks.

Behind the deal is demand from the buyside for an algorithmic trading solution over which they have almost complete control.

By licensing the software these shops can bypass the bulge bracket's algorithmic trading systems.

At the same time, in working with a technologically savvy trading shop such as Weeden, they can hasten their journey up the algo learning curve.

"These are the shops that are afraid to execute through the banks because they believe they are being gamed," says Lee Maclin, principal at algo vendor Pragma Financial Systems."So Weeden has come up with this idea of an unhosted deployment."

Pragma was founded four years ago by New York University math professor Lee Maclin and ex-hedge fund trader David Mechner. The firm is one of the few vendors to develop and market trading algorithms. To date, most algos have come from the trading desks of the bulge-bracket firms. Pragma's customers are small broker-dealers and large money managers.

The vendor's relationship with Weeden, a 150-person agency brokerage, began about a year ago when Weeden licensed the software for its traders.

The "Pragma at Weeden" concept, whereby Weeden and Pragma cooperate to install Pragma's technology on a money manager's premises, began this year. The duo is in the midst of a broad-based rollout.

"We are trying to provide something that is really different," says Doug Rivelli, in charge of program trading at Weeden and the brains behind "Pragma at Weeden." Weeden needed algos to compete against the bulge firms. Pragma needed customers. "We've been to see virtually every large buyside organization," Maclin says.

Weeden does make Pragma's algos available to its customers in the conventional manner. The technology resides on Weeden's site. Buyside traders access it through their order management systems. But it is Rivelli's "unhosted" deployment idea that is unique among broker-dealers. It tantalizes many buysiders, they claim.

Under the scheme, the servers containing the algorithms are installed on the money managers' sites. They are not hosted by, or installed at, Weeden. The money manager enters into a licensing agreement with Pragma.The appeal to the buyside of such an arrangement is simple: They can avoid their brokers' algos and eliminate any possibility the brokers will peek at their trades and front-run them.

Weeden's role in this arrangement is to act as a service bureau and deal with technical issues, as well as to help the buyside trader customize the algorithms. "When there is a problem, they call us," Rivelli says.

Weeden may or may not act as an executing broker for the trade. The buyside trader can direct trades through the DMA pipes of other brokers. But Weeden still gets paid. Some money managers enter into fixed-cost contracts with Weeden. Others pay by the share - "in the low mils," Rivelli says. If the money manager decides to route trades through Weeden's pipes, the applicable commissions would offset any fixed charges.