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June 1, 2011

The Right Mix

Batterymarch Financial Blends Proprietary Analytics and Buyside Trader Know-How

By Michael Scotti

Once equity trading went electronic, the smart money knew it was only a matter of time before machines began making decisions that were once the domain of the trader. For the buyside, it has always been essential to know which broker to choose, based on past performance and a sellside firm's expertise.

Today, the same rules apply---except that man's best friend on the buyside isn't the person on the other end of the phone or IM. It's becoming more and more the computer on the desk.

Traders today at Batterymarch Financial Management are the beneficiaries of an overhaul of their trading system that makes skilled traders better. The firm's new technology uses computers to analyze historical trading information, and then provides them not only with a trading strategy, but also the best brokers or algos to choose from for a particular stock. It's called profiling a stock, and many predict this is where trading on the buyside is headed.

At Batterymarch, traders are still important to the process, as they can override the suggested strategy. They also still need to decide which algo or desk to use from a short list of suggested options. For traders there, the technology introduced in September systematizes a process that was once manual. But more important, it puts them in tighter sync with portfolio managers and gives them greater control over their orders.

Profiling

That's the payoff from two years ago, when Batterymarch, a Legg Mason company based in Boston, hired a quant analyst to review its trading and examine how portfolio managers interact with the desk. In roughly a year, the new hire was promoted to director of trading. But not before he began introducing new ideas at a firm that has been an iconoclast in its own right for much of its 42 years. 

Dragan Skoko

"We did this to empower our traders to be more efficient in the current market structure," said the new hire, Dragan Skoko, now Batterymarch's head of trading. Skoko comes with a heavy math and statistics background. "We believe it is necessary to give them the proper tools, so when they reach a fork in the road, they can make the important decisions that add a lot of value."

It starts with a new proprietary pre-trade platform, which drives the process and tells traders the best way to trade a stock. Capturing historic data from a variety of internal and external sources, the pre-trade platform profiles stocks based on a number of characteristics, including liquidity, volatility, trend and momentum.