Buyside Ups the Ante in Program Trading
Traders Magazine, January 2008
"At the end of the day, from my perspective, it is still a relationship business," Galloway says. "People still like to talk to people."
Vendors Respond
Advertisement
EMS builders also note that the increase of program trading on the buyside is affecting their product development. Although they serve both sides of the Street, EMS firms have gone to great lengths to take the buyside's needs into account, Kedia says.
At FlexTrade, the buyside now represents almost two-thirds of its client roster, according to Kedia. His firm's EMS development is more focused on buyside-specific requirements-such as trade-cost analysis and the ability to design customized algorithms, as well as portfolio-level algorithms using various models.
"In terms of [FlexTrade's] research efforts spending," he adds, "it's more on the buyside now, relative to the sellside."
Buyside traders have been looking for advances in portfolio algorithms to take even more control of their orders. According to a 2007 TABB Group report on institutional equity trading, 65 percent of large-and 60 percent of midsize-buyside firms say they are using portfolio algorithms, either themselves or, more commonly, through their brokers.
Algorithms trace their origins to program and proprietary trading desks. Fittingly, a majority of bulge bracket and other large brokerages have been busy developing better portfolio algos-the next level in the algo space.
According to TABB, they are designed to execute "a strategy based upon selected correlations of multiple assets-assets relative to one another, to benchmarks or to hedging instruments."
Portfolio algos that balance buys and sells or excel at maintaining specific neutralities, like balancing sectors, potentially could push more agency volume into the electronic camp, says Lehman's Fagen. But because many portfolio algos are relatively difficult to use, he adds, complex agency orders will still reach sellside desks to tap their high-touch proficiency.
SIDEBAR to Main Story:
Joined at the Hip
Large brokerages have seen increased algorithm use in the portfolio business push their firms' electronic and program trading desks into closer alignment. At those firms, the trend has led to gains in efficiency and reduced costs.
Programs and algorithms are closely intertwined on the electronic trading desk at Sanford C. Bernstein, says David Liles, its global head of electronic trading, a department which encompasses both. This two-pronged coverage has allowed his desk, which was formed almost five years ago, to integrate its pre-and post-trade analytics tightly with its algos and other quantitative trading tools.
"It's a little more of an integrated effort than you'll find at some other firms, and it works to our advantage," Liles says. "It's not two competing groups with different agendas trying to pull clients in multiple directions." Both desks were growing in 2007, he notes. But Bernstein's algo business has been growing noticeably faster than its program business.
Merrill Lynch has also seen the two desks grow together, says Bill Stush, a director within portfolio and electronic trading. The firm runs both a portfolio and an electronic desk, but considers them to be one functioning unit with the same product and sales management team. And when a program order comes to Merrill Lynch, there's no fighting between the two for it. "The order and client direction should decide the execution venue, not a particular coverage group," Stush says.
For more information on related topics, visit the following channels:
