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November 13, 2007

Risk Bids Making a Push

Basket trading gets a shot in the arm

By James Ramage

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Don't call it a comeback, but risk bids on program trades are on the rise. With competitive pricing, manageable volatility and ever-improving technology, industry watchers expect to see growth in principal bids for program trading.

According to Goldman Sachs, its clients' use of principal bids is on the upswing this year. In fact, Goldman sees a rise in program trading across the board-both risk and agency business, when comparing 2007's figures to last year's. Goldman has a good vantage point on the popularity of principal bids. Joe Montesano, who heads the firm's risk business on the U.S. program trading desk, estimates that it wins about 40 percent of the risk programs that it bids on.

Still, industry insiders say the bulk of the program business-roughly 75 percent-is executed on an agency basis. But they also say principal bids are growing. This growth stems from the ultra-competitive nature of the business, which has produced tight pricing for institutional clients. Some clients are big fans of principal bids because they lessen their market risk, as the clients can lock into a price for the basket of stocks at once.

The head of program trading at a top Wall Street firm-who declined to be identified-confirms Goldman's assessment of the growing nature of risk bids. "Risk bids remain a popular strategy," he says.

Sweet Technology

Ken Marschner, the head of the U.S. portfolio trading desk at UBS, has seen better trading technology create opportunities for more risk trading. That includes better algorithms and the greater ease in crossing stocks in dark pools. Thomas Weisel Partners, whose program desk does not commit capital, has seen the tight pricing of principal bids eat into its program trading business, according to Robert Redfield, managing director of portfolio trading.

The program desk at BNP Paribas Securities is considering adding risk bids to the list of services it offers, says Alan Rubenfeld, a managing director. And in a new TABB Group study of buyside firms, almost nine in 10 large firms said they see their principal program-trading use staying the same or increasing over the next two years.

"That's a very high number," says Matthew Simon, a TABB Group analyst. "We're seeing more of a shift toward principal trading during volatile market conditions."

In addition, TABB Group says the numbers are up for all program trading. TABB says the buyside traded about 9 percent of its flow via programs in 2006. TABB projects a rise to 12 percent this year.

Still, generalizations about risk bids can be complicated. Doug Rivelli, who oversees Weeden & Co.'s agency electronic trading, says it's hard to say if risk bids are up because every broker has its own set of clients: Are they index clients or fundamental clients investing in small-cap, illiquid names?