Pragma, an algorithm vendor to broker-dealers and statistical arbitrage hedge funds, has begun to court traditional asset managers.
Under a new initiative dubbed SAMBA, for Single-Access Multi-Broker Algorithms, the ten-year-old software shop is offering both technology and support to buysides newly wary of using their brokers’ tools.
“In the past six months, we’ve noticed an uptick in interest from traditional money managers that are aware of the conflicts of interest broker-dealers have when routing orders,” Pragma chief executive officer David Mechner said.
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A key problem, Mechner explained, is the fee structure of exchanges and dark pools. Because they pay rebates for posting orders and charge a fee for orders that take liquidity, a broker may choose to rest an order rather than trade immediately. That way, it collects the rebate, and avoids the take charge, even though the tactic may not be in the best interest of the client.
Under Samba, Pragma acts as an outsourced trading desk, making all trading decisions, including how to trade and to which venue an order should be sent. As Pragma is acting as a vendor, and not a broker, it is conflict-free, Mechner said.
All trades are done through the client’s broker via the broker’s market access technology, but Pragma’s algorithms and smart routing oversee the trade. Who gets the rebates or take charges is up to the buyside client.
Typically, according to Mechner, hedge funds will get fees and rebates passed back to them. But because institutions need to pay a flat commission, the fees and rebates still go to the broker. Under SAMBA, since the buyside client is now effectively controlling the routing, the broker getting the fees or rebates does not create a conflict of interest. “The client controls the routing, the broker gets what it gets,” Mechner said.
