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Robert Schuessler
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A Smarter Monkey

In this contributed piece, TIM noted that some traders do better than others when using data that has been run through certain analysis - that is, have used some form of machine learning to assist them.

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March 7, 2008

Opportunities through TCA

By Michael Scotti

Trade-cost analysis (TCA) will become more important to the buyside. TCA will also become a more valuable tool to lessen the costs of trading. Those were the opinions of 99 buyside trading professionals in a Traders Magazine survey on trade-cost analysis conducted 13 months ago. In fact, 78 percent of those polled said that TCA will not only get better as a predictive tool, but nearly 60 percent said it will become a larger part of their compensation formula.

That survey foreshadowed some of the strategies chronicled in last's month's cover story, "Old Dogs, New Tricks." The feature outlined how two large buyside shops-AllianceBernstein and Morgan Stanley Investment Management (MSIM)-are supporters of using quantitative tools in their quest to trade stocks more cheaply and efficiently. AllianceBernstein's global head of trading, Keith Gertsen, started what he refers to as a "quant lab"-essentially an in-house trade-cost-analysis team composed of math and computer whizzes. They seek ways to trade better than the competition. Ray Tierney, the global head of trading at MSIM, is coming from the same school of thought, and is also leaning heavily on trading analytics to trade smarter. Both happen to be former sellside traders, where competition is cutthroat and profitability is the main driver behind decisions-not TCA. Interestingly, both men are among a handful of sellside veterans who moved to the buyside.

Rob Hegarty, head of the securities and investments area at the consultancy TowerGroup, says the buyside is looking for ways to gain an edge in its investment performance. Better trading can boost returns, he said. Recruiting experienced top sellside talent can upgrade the desk. Hegarty recited numerous advantages that sellsiders bring to the buyside. First, they understand the various aspects of how liquidity is discovered. Before self-trading took off on the buyside, it was the sellside that was on the front lines interacting with the various execution venues. "The buyside has historically been one step removed from this process," Hegarty said. Experienced sellsiders have many relationships, according to Hegarty. That was the case when AllianceBernstein started developing the "quant lab" team. Staffers either worked directly with Gertsen in the past, or he found them through the network he built, he said. Sellside veterans also understand how the top buyside shops operate. In short, Hegarty said, a buyside firm can gain critical insights into how competitors trade. "By bringing them on to the buyside, it gives them a lot of intelligence," he said. "They can bring a set of best practices."

During his days overseeing sales trading at Morgan Stanley, MSIM's Tierney learned about the largest buyside desks. But he said he couldn't point to any firm that he tried to emulate when setting up the MSIM desk. Still, he noticed certain practices that he thought made sense for a buyside desk.

One marketing executive at a money management firm said reduced trading costs can mean plenty to a manager's profitability. That's true if that savings can push a firm's investment performance into the next quartile. "It can be the difference between getting a new account and not getting one," he said, "or keeping an account when performance falters." Finally, reduced trading costs can sometimes mean higher revenues. "And with a few extra hundred million under management at 50 basis points," he said, "we're talking about real money, and why would you leave that on the table?"


Correction

In January's Buyside Snapshot we wrote that BIDS Trading was half-owned by the New York Stock Exchange. It isn't. The NYSE is BIDS's 13th investor. BIDS is also doing a joint venture with NYSE Euronext, but this is separate from the latter's role as an investor. Traders Magazine regrets the error.

 

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