Sales traders may be placing even fewer calls to some of their buyside clients if a new technology sticks.
Trade Ideas Limited (TIL), a British company formed by a group of global banks, is promoting an electronic alternative to the practice of sales traders phoning their customers with short-term investment strategies.
The service has caught on in Europe and is now making inroads in the U.S., especially with hedge funds.
“Clients, whether they’re execution-type clients or using quant stat-type models-who want to trade against or execute the ideas immediately-are looking for new ways of trading in the markets,” said Simon Ellis, U.S. manager of the London-based technology firm youDevise. That applies to hedge funds, too, “who want to know which parts of the markets are moving at any one point in time.”
TIL, a London-based company created in 2005 and owned by Citigroup, Credit Suisse, Dresdner Kleinwort and Merrill Lynch, built a central utility for sending targeted trading recommendations that connect to the buyside trader through a front-end-based vendor platform. TIL then partnered with software firms, such youDevise, to build these connective interfaces.
And the number of participating global buyside and sellside firms grew 156 percent year over year.
Of the 150 sellside and 205 buyside participating firms, 25 percent are based in North America, the company reported. Of participating buyside firms, half are hedge funds and half are traditional money managers.
The growth in trading ideas has mushroomed. For June, the volume of ideas transmitted electronically through TIL’s central utility increased 300 percent, year over year-to 20,898, from about 5,220-the company reported.
TIL began in Europe and expects usage to increase dramatically in North America, said Colin Berthoud, youDevise’s director. Large U.S. brokers, such as Citi, Merrill Lynch, Morgan Stanley and Lehman Brothers, used TIL’s services in their London and Europe accounts first, and are expected to increase their domestic usage.
And a growing number of U.S.-based brokers have been signing up and bringing the service across the Atlantic. A large hedge fund was the first U.S. buyside firm to start using the product through TIL and the youDevise front end in the third quarter of 2006, Berthoud said.
The practice of delivering trading ideas to hedge funds and others from the trading desk has picked up in recent years.
A few years ago, large investment banks like Lehman Brothers and Merrill Lynch started putting analysts on trading desks to service their hedge fund customers.
TIL’s founding investment banks banded together to address what they perceived as a coming surge in buyside demand for trade ideas-beyond traditional research.
They also saw a need for a standard protocol and interchange for the dissemination of ideas from the sellside to the buyside so either could use the front-end application of their choosing, said Colin Jowers, global head of research operations, capital markets, at Dresdner Kleinwort.
In the past, analysts’ reports would offer investment advice on companies over a 12-month window, but would not advise when and how to buy the stock, or when to sell, said Rich Koppel, a managing director at youDevise.
“Just because an analyst says something is a buy over the next 12 months, does that mean that that stock is going to go up over the course of the next couple of weeks,” Koppel asked. “What amount of my portfolio do I invest, then? And even though the analyst has recommended that stock, is that appropriate for my strategy?”
Formerly, sales traders would pass along such trading ideas to the buyside over the phone. TIL was formed to link the analyst-sales trader-hedge fund connections more efficiently.
The industry for making research more efficient has been a developing one-Thomson and others several years ago created a central bank for analysts’ research. But the concept of packaging traders’ ideas to hedge funds is relatively new.
How TIL works: A sales trader-brokerages pay for the service-monitors the stocks his firm’s analysts follow, said Koppel. The sales trader then takes a research analyst’s recommendation and develops a trading idea around it for a specific buyside client. He sends it to the TIL central utility for the targeted client to access through a Web-based front-end system.
The idea is also time- and price-stamped so the buyside trader can see how it performs in a real-time and absolute basis. This helps him determine who’s really delivering ideas that add the most value.
According to TIL, trade ideas are client-specific, long or short trading recommendations that also typically include the amounts that should be invested, how to build a position and when to close it. For the most part, the greatest demand for these trading ideas comes from hedge funds, stat-arb-types and other high-frequency traders.
Citing confidentiality, TIL declined to identify the names of its clients. Traders Magazine contacted half a dozen buyside traders seeking comment.
One trader for a growth-based asset management firm in small- and mid-cap names said his shop doesn’t use the technology or the product and declined comment. A hedge fund manager also said he hadn’t used the tools because his firm doesn’t trade based on Street-generated ideas.
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