Hitting the TCA Sweet Spot
Trade Cost Analysis Births New Algos at Abel/Noser
Traders Magazine, March 2012
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.
"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."
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.
Oberhaus praised Abel/Noser's TCA data for being both timely and easy to understand. He said he shares TCA data with a number of parties, including an internal oversight committee, a board of directors and plan sponsors. All of them find the information easy to digest, he said.
While Lord Abbett does TCA metrics through other vendors as well, it sees a benefit in providing comprehensive trading data to Abel/Noser. Not only can the firm deliver graphic reports that help all stakeholders understand the ins and outs of trading, it also can help managers develop algorithms tailored to their own specific needs, Oberhaus said.
"I can look at a manager's footprint and have the trader build algos through Abel to match that expected footprint," he said. "It's been a really nice tool for us."
Abel/Noser has been offering these customized algos for about two years now. Conlin notes that some managers are always buying stocks that are rising, while others try to buy stocks near their bottoms, often while the names are continuing to fall. Each manager is unique, he said, and firms should know a manager's modus operandi before throwing a trade into an algo.
Some algo providers only have trade data at the company level, not at the level of the individual manager. Conlin said it is important to have the more detailed data associated with each manager, and firms feel comfortable enough with Abel/Noser to pass on trading information at that level of detail.
Abel/Noser was founded in 1975. When it first started offering TCA, many on the buyside were reluctant to hand over data, so the firm took its case to sponsors, who are the money managers' clients. Pensions and endowments showed an interest in the service, and eventually the buyside became believers in TCA as well.
Power of Partnership
Conlin credits part of his firm's success to the fact that in an age when so many Wall Street firms are public companies, Abel/Noser still operates as a partnership. The firm has its own money on the line, and too much to lose if it makes a mistake.
According to Peter Weiler, executive vice president of sales at Abel/Noser, the partnership structure keeps the firm focused on the big picture.
"There are two types of firms-you can be short-term greedy or long-term greedy," said Weiler. "We're long-term greedy. We don't need to compromise the firm on a quarter's worth of profitability."
Weiler said the revelation last year that Pipeline Trading Systems failed to disclose how its dark pool operated has shaken the confidence of many in the industry. In addition, just when agency brokers might be needed to avoid conflicts of interest, there are fewer of them around.
"If you don't have a niche, and you are small, you're basically out of business," Weiler said. "I would expect a number of firms either trying to merge as a last-ditch effort, or folding."
Commission rates are still being squeezed, and with recent low volumes, many predict that fewer and fewer agency brokers will be able to stay in the game. Abel/Noser believes it will be one of the firms left standing, though. The company has no debt and has streamlined its operations, having already reduced staff, Weiler said.
In 2009 and the beginning of 2010, Abel/Noser hit a rough patch along with everyone else in the trading business. It let go about 10 people from across the company, roughly 10 percent of the firm, Weiler said. Those layoffs are over now, and he said the firm is looking to make key hires if it can find the right people.
About half of Abel/Noser's business is in algos and cash operations. About 30 percent comes from TCA and product analytics through a separate unit called Abel Noser Solutions. The balance is made up by a transition management business the firm has.
Abel Noser Solutions is technically a separate company and has a separate management from Abel/Noser, though it has the same owners. Weiler said having a separate management structure is important when going to clients because it prevents potential conflicts of interest.
Until February, the affiliate even had a completely different name, Ancerno, but the firm recently decided it made more sense to rebrand the business to take advantage of the Abel/Noser name.
The transition management business has always remained under the Abel/Noser umbrella. Its revenues tend not to be correlated with the other units, which can help to even out the firm's finances, Weiler added.
The firm's TCA and algos businesses are, of course, related. And the key to successfully bringing the two together, Weiler said, is trust.
"We don't own the data, but we control it, and we're able to produce great products for clients that make sense," Weiler said. "Whether it's analytics, or it's creating customized algorithms for them, we're doing that."
Weiler added that the firm is not looking at customer data and trying to reverse engineer it for internal trading profits. Rather, it creates analytics that empower clients, cutting through what he calls "the intentional opaqueness and duplicities of Wall Street."
In today's low-commission environment, winning the trust of clients is more important than ever. Weiler said the industry is still scraping along the bottom, though he hopes to see volumes pick up again soon. And even if that takes longer than everyone would like, a small firm that does a couple of things really well can succeed in any environment, he said.
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