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March 2, 2012

Hitting the TCA Sweet Spot

Trade Cost Analysis Births New Algos at Abel/Noser

By James Armstrong

Also in this article

The ranks of agency brokers have thinned in recent years, with Ticonderoga Securities and WJB Capital being two recent casualties of the trading downturn. The cry from the buyside has been that there are too many brokers pitching products that are too similar, particularly agency shops that offer standard execution and check-the-box research.

But given the buyside's increased hunger for more analysis of trades, one agency broker might have found itself in a sweet spot. Abel/Noser offers respected trade-cost

analysis and has been able to capitalize on that service and on its long-standing relationships with clients, both money managers and pension funds. Consequently, the firm is now offering new products-namely, customized algorithms-that have been developed from its TCA research.

Kevin Kozlowski, an analyst at Greenwich Associates, said many agency brokers have been trying to add to their product offerings in an effort to keep afloat in a low-volume trading environment. 

William Conlin

"Everyone is seen as being in the same boat," Kozlowski said. "So what are you doing as an agency broker to differentiate yourself from the rest of the pack that will catch the eye of institutional investors?"

Because clients trust Abel/Noser with their trading information, the firm has been able to leverage its consultative relationship with the buyside to offer new trading algorithms. Using the TCA information it collects, the firm can create algos tailored to meet the needs of individual managers.

More and more, smart firms are mining TCA to improve their trading and add alpha. But sending 100 percent of trade data to a third-party behemoth to analyze would make many on the buyside uncomfortable.

"No large money manager is going to send all of their trades to analyze to any of those big firms," said William Conlin, president and chief executive officer of Abel/Noser.

In addition to not wanting to tip their hands to the bulge, many on the buyside are concerned that brokers might try to go after order flow and steer trades toward their own dark pools, Conlin added. That's not a problem with shops like Abel/Noser that don't have dark pools.

"Every brokerage firm out there is taking the flow to make money with it," Conlin said. "Our goal isn't making money off order flow. As agent, the commission is plenty."

Usable Data

Jersey City, N.J.-based mutual fund company Lord Abbett shares all of its data with Abel/Noser, from both domestic and international trades. Ted Oberhaus, director of equity trading at Lord Abbett, said he's very comfortable sending data to the firm.

"We've known them for over a decade and trust that they're going to be confidential with our data," Oberhaus said.