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April 15, 2009

Program Trading Tools Need Upgrade

By James Ramage

The electronic trading tools for program trading that most brokers and technology vendors offer their clients have not kept up with their single-stock offerings. So says a recent report on program trading by TABB Group, which argues that portfolio traders are paying higher execution costs.

To begin with, vendors and brokerages have developed technology that has focused on single stocks, the report said. From trade-cost analysis to algos to execution venues, technology for portfolio trading consistently falls behind that used for single stocks.

"Although portfolio analytics look at the characteristics of each holding and the correlation between them so the portfolio manager can make the appropriate trade-off between risk and return, there are few tools available to carry those objectives down to the execution venue," TABB Group's Matthew Simon wrote in the report.

Traders need portfolio-level analytic tools that work within executing baskets that can instruct them in real-time while market conditions change, Simon wrote. Portfolio algos need to be more predictive, he added, and able to analyze portfolio constraints, correlations and liquidity costs all at once.

Traders on the buyside support TABB's findings. At a recent conference, they noted how hard it was and how long it has taken the sellside to develop high-quality portfolio algorithms.

"We are still trying to bridge that gap between single-stock algorithms and portfolio algorithms," Eric Yi, a trader with Pyramis Global Advisors, said at a recent conference. "I'm not convinced we are there yet."

Yi added that a trader can get some of the risk-control functionality that portfolio algorithms try to incorporate with an execution management system.

And execution venues aren't off the hook, according to TABB-they need to improve their functionality. For example, too few dark pools can properly incorporate portfolio constraints, Simon wrote, for either point-in-time or continuous crosses.

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