Neovest’s Do-It-Yourself Algo Revolution

The Street's First Algorithmic Management System

It’s official. First came the OMS. Then the EMS. Now there’s an AMS. Neovest, the builder of a popular execution management system, is incorporating functionality into its platform that lets traders more efficiently manage their use of the 100-plus algorithms on the system. The vendor, a subsidiary of JPMorgan, calls AlgoGenetics, its new software toolkit, an algorithmic management system, or AMS.

This “new class of software,” as Neovest deems it, lets traders construct their own “meta-algorithms”-automated execution strategies that combine algos from multiple brokers, dark pools and direct-market-access tools. In doing so, it frees them from the time-consuming process of overseeing and adjusting their electronic execution strategies.

In effect, AlgoGenetics lets traders replicate the way they trade manually through self-customized algos, which they can name, share on their desk and update whenever they want. They can also use AlgoGenetics to adapt the behavior of existing broker algos to suit their execution needs.

Free at Last

A trader can, for example, construct a meta-algo to buy a stock via a Credit Suisse implementation shortfall algo in the morning, regularly checking for crosses on NYFIX Millennium. After a predetermined portion of the order is executed, the meta-algo could switch to a JPMorgan volume-based algo, changing its participation level in the market based on the stock’s price. The algo could also be programmed to spray orders into dark pools.

“Traders don’t have to be boxed in anymore,” says Bryce Byers, Neovest’s chief executive officer. “They know which algorithms [from different brokers] they want to use for specific situations, and when to switch algos based on market conditions, price, time or other criteria. They can now leverage the strength of all their algo providers to trade exactly the way they want.” The Neovest EMS gives users a suite of DMA tools and access to 20 dark pools, 130 broker-dealers and algos from 20 brokers.

AlgoGenetics was developed by a half-dozen technologists from Neovest and a team of six from JPMorgan’s algo product development group. The platform grew out of the algorithmic customization work JPMorgan does for clients. More than 50 percent of the firm’s clients ask for some level of customization, notes Carl Carrie, global head of Neovest and algorithmic products in JPMorgan’s electronic client solutions group. He speculates that many buyside traders will eventually become conditioned to “building and harvesting their own algos.”

JPMorgan bought Neovest in 2005, at a time when other broker-dealers were snapping up independent DMA platforms. These include Citi’s acquisition of Lava Trading in 2004 and Lehman’s acquisition of RealTick in 2005. Fifteen broker-dealer “resellers” currently offer the multi-broker Neovest platform to their clients. These include Pershing, Electronic Specialist and Fidelity Capital Markets Services.

Next Step

Neovest doesn’t charge customers for the AlgoGenetics platform. As with all trading through Neovest, customers pay brokers and execution venues for the executions they receive. Neovest gets $0.0008, or 8 mils, per share from brokers, with no minimum fee.

Adam Sussman, an analyst at research firm TABB Group, notes that the functionality in Neovest’s AlgoGenetics represents the “next step” for multi-broker algorithmic aggregation platforms as execution management becomes more complex in a fragmented marketplace. The initial advance, spearheaded by Bloomberg, was enabling traders to access multiple algos from different brokers on one system. Many vendors of order management systems and EMSs, including Neovest, now aggregate algos from dozens of brokers.

Sussman sees two main benefits to this type of algorithmic management platform. First, it enables users to switch between algos without manually overseeing that process, by setting conditions “that will automatically drive an order from one algo to another.” In Sussman’s view, this is particularly important for firms shuttling 20 to 25 percent of their flow through algorithms, since those firms are likely to encounter workflow-management issues. Second, Sussman adds, creating meta-algorithms forces a trader “to automate his thought process, enabling him to map what he wants to see happen with an order onto an algorithm.”

Other technology providers, such as Progress Apama, FlexTrade and Portware, offer tool kits that enable traders to build their own algos, but these typically require some programming or computer skills and are not set up to readily use broker algos as components within a larger execution strategy.

Neovest’s Byers notes that AlgoGenetics was designed for ease of use. “A trader doesn’t have to corner a programmer or ask the sellside to customize an existing algo to meet his specifications,” he says. The trader can use AlgoGenetics’ drag-and-drop interface to create algos on the fly and put them into operation immediately.

The first clients to use Neovest’s AlgoGenetics are three New York-based hedge funds, including Scopus Asset Management. Bill Skutch, the head trader at Scopus, says the platform “allows us to maintain neutrality among brokers and take more control over algos by customizing them for individual stocks or sectors.”

Stronger Platform

Brad Bailey, a senior analyst at research firm Aite Group, points out that buyside traders increasingly want more flexibility around the algos they use. “[AlgoGenetics] is a tool that makes absolute sense if it optimizes a trader’s use of algorithms, leads to cost mitigation and has a rules-based approach to execution,” he says.

In addition to benefiting traders, AlgoGenetics could enhance Neovest’s position in a competitive landscape for multi-broker EMSs. JPMorgan’s Carrie says AlgoGenetics puts Neovest in the catbird seat. “We believe Neovest will be the strongest algo platform in the near term as a result of AlgoGenetics and our other offerings,” he says. “This empowers traders not just to trade better, but to build their own capabilities for trading better. It’s a greenfield opportunity for traders.”