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Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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September 28, 2006

Algos Need Not Apply

By Nina Mehta

Algorithms, it seems, aren't for everybody. The traders at ICM

Asset Management in Spokane, Wash., for instance, eschew the robotic liquidity seekers in favor of human intermediation when it comes to trading the small- and mid-cap names in which ICM specializes.

Head trader Timothy Olsen points out that his typical process for finding liquidity in small caps is through natural indications of interest on the phone and electronically through AutEx and Bloomberg. He next checks Liquidnet and ITG's Posit and dark servers, which access additional dark liquidity pools. He then goes out to the displayed market and tries algorithms to track down liquidity.

Olsen began experimenting with algorithms three years ago-"mainly because some of our contras, the big mutual funds, went in that direction," he says. Algorithms are getting better at trading small-caps, he adds, but they have still proved to be only minimally helpful in executing the desk's workflow.

Broker relationships, however, remain vital. "The industry has changed rapidly, but I still value brokers who are creative and can find natural liquidity for us," says Olsen.

ICM has cut its broker list to 26, down from about 40, over the last two years. It did this to focus on the value generated by its research brokers.

"We know there is pressure on commissions today, but we don't have any commission limits for those brokers who bring us their A' game on a daily basis and provide us with the information we need to make investment decisions on behalf of our clients," Olsen says.

The firm's main research brokers for small-caps and "smids" (small- and mid-cap combinations) are Bear Stearns, Roth Capital Partners, Raymond James Financial and Merrill Lynch. In micro-caps, where research brokers are "haves" or "have-nots," says Olsen, Merriman Curhan Ford & Co. and Roth Capital are at the top of his list.

Olsen has eight years at ICM Asset Management, landing with the firm after a stint on the sellside.

In 1998 the small-cap money manager was launching a long/short equity hedge fund with a micro-cap focus. The firm needed help on its equities trading desk, so Olsen headed for the Northwest from Jefferies & Co.'s Los Angeles office.

ICM manages $1.4 billion in assets. Of that, $1.2 billion is in equities, with the vast majority in small-cap stocks. The money manager holds about 40 names in its portfolio. Olsen and two colleagues on the trading desk, Richard Mattox and Sue Broom, divvy up trades based on their liquidity characteristics. Olsen trades the more illiquid names.

Despite minimal use of algos, Olsen's desk has embraced other forms of electronic trading. About 16 percent is done through direct market access, 13 percent through crossing networks, and 2 percent through algorithms.

ICM Asset Management Equity AUM: $1.2 billion Desk: 3 Traders Broker List: 26 Firms Avg. Comm.: 4 cents per share OMS: Charles River Trade Cost Anal: ITG Inc.