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June 1, 2011

Next Phase

By Michael Scotti

I recall an absent friend, Mike Keady, telling me that selling trade-cost analysis was a tricky endeavor. If the head trader didn't want the service-and many didn't-Keady would have to skillfully walk a tightrope around the trading desk. His next option was to impress the firm's chief investment officer with the importance of trading costs. If that failed, it didn't hurt having allies at the ultimate client, the pension funds.

Michael Scotti

Fast-forward 10 years, and you can read in this issue how pre- and post-trade analysis are a friend not only of the trader, but also of the investment manager. Maybe that's what TCA needed, after all, to make it more meaningful, to be more deeply integrated into the investment process, rather than a compliance afterthought.

This month's cover story features Batterymarch Financial Management, a quant firm that has always done things a little differently. To revamp the desk, the firm brought in quant trading strategist Dragan Skoko two years ago. The upshot is that he created an in-house pre- and post-trade platform that work together and that make traders more valuable.

Batterymarch's pre-trade platform calculates a strategy for the trader, who then chooses from a subset of algos and trading desks. The pre-trade analyzes a ton of data points and gets the trader out of the gate and into the market faster. The trader can also override the strategy. It's a supervised process, as Skoko called it, and that is where traders earn their keep, particularly when markets or stocks go haywire.

Other firms are already doing variations of this, but not many-fewer than 10, according to one estimate. It's called profiling a stock and is based on historical information. This undoubtedly is the next phase in the buyside becoming more sophisticated in its execution strategy. And you're sure to hear more about this, as more firms move in this direction.

What should be noted is that the Batterymarch traders not only embraced the change, but played an integral part in developing it. That sent a message to them that introducing new technology to the trading process was not about replacing traders, but making them more effective. I think you'll find this profile of interest.

You'll also see two related stories in our Inside Trading section: one on investor confidence and another on inflows into hedge funds. Investor confidence has been down for the last year since the "flash crash." But on the other hand, hedge funds are beginning to see strong inflows that could bode well for a year that has been a disappointment as it relates to trading volume. Let's see what the rest of the year has in store. Enjoy the issue.


Michael Scotti

Editorial Director


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