Two vendors are pushing a technology that monitors the market for traders.
Neovest and Vhayu Technologies are competing to sell market-scanning software to market makers and proprietary traders. Their products track every trade in every stock and alert traders to significant changes in price and volume as well as news. Traders can use the technology to monitor the less-active stocks on their pads, freeing them to concentrate on the big-movers.
"Desks can watch more stocks with fewer traders," said Scott Gietler, vice president of business development at Los Gatos, Calif.-based Vhayu (pronounced vy-u) "They don't have to watch the market all day. We can tell them when something happens," he added.
With many broker dealers planning to increase the number of stocks they trade but facing a shortage of experienced traders, the two vendors (among the most prominent in their market space) may be in the right place at the right time.
Merrill Lynch, for example, initially planned to build up its market making capacity from within. But tight labor conditions reportedly forced the retail giant to reverse course and buy wholesaler Herzog Heine Geduld. Competitors Morgan Stanley Dean Witter and Salomon Smith Barney have both indicated they will boost the number of stocks they trade into the thousands.
Rob Trimmer, director of sales at Atlanta's Neovest and a former coverage trader, says vanishing spreads and market volatility compel a market maker to manage positions aggressively. He adds that cost-conscious banks buying brokerages are pushing traders to handle more stocks as well.
"A good trader used to handle a couple of dozen names," Trimmer said. "Now he's being asked to trade twice that many."
Great Start
Neovest hit the ground running when, shortly after it was formed in late 1999, it landed the biggest fish – Knight Trading Group – as a customer. Knight not only picked Neovest's flagship product, also called Neovest, but also took an undisclosed stake in the vendor.
Knight has installed the software in its trading rooms in Jersey City and London and plans to do the same in its New York, Tokyo, Chicago and Boston locations.
"We picked Neovest because it can sort through 18,000 securities in real-time and give off patterns of activity that allow a trader to identify movements in his or her securities," explained Bill Karsh, a senior vice president in charge of business development and operations at Knight and a member of Neovest's advisory board.
"It allows our market makers to trade intelligently enough not to be on the wrong side of the market," Karsh added.
Trading Teams
Trading teams at Knight typically handle 50-80 stocks and consist of one senior trader with two or three assistants. Knight claims to trade 18,000 stocks.
Neovest, the result of a merger between a small Atlanta agency broker called Volume Investor with First Alert, a Provo, Utah, software vendor, has also inked a deal with Merrill Lynch's soft dollar division, Citation Group, to market to Merrill's buyside customers.
Vhayu, co-founded by Tejpal Chadha, one of the architects of the Pentium chip, began life as TraderBot in 1998. Initially an Internet service for daytraders, the TraderBot software was upgraded into TraderAlert for use by institutional traders last September. Three broker dealers are reportedly beta-testing TraderAlert – two in their market making divisions and one in its proprietary trading group.
That proprietary desk watches thousands of stocks and needs to keep abreast of news and market moves, according to Geitler. Prior to using TraderAlert, staff members would manually feed hundreds of symbols into their Bloombergs and run the calculations. TraderAlert does all the work for them.
"We process 5,000 quotes every second," Geitler said. "And we guarantee the scans are being run on the most recent ticks."
Both firms got their starts selling to day-trading brokerages. Neovest counts Heartland Securities, TradeScape.com and Momentum Securities among its customers. Vhayu has signed deals with the
Active Trading Network and TradingMarkets.com. At this end of the market both firms compete with the successful Omega Research, whose RadarScreen software can be installed on a trader's PC.
Day traders use the technology differently than the Wall Street pros. Rather than program it to continually update them about "events" occurring in a select universe of stocks, they program it to find all stocks in the market in which a certain event is occurring.
A day trader, for example, might program the software to produce a list of stocks trading above their 30-day moving averages while a market maker would devise a query that would cause the system to notify him when one of his stocks trades above its 30-day moving average.
The common denominator is the toolbox. The systems spit out technical indicators such as moving averages and volume spikes long favored by market technicians predicting the direction of the market. Neovest and TraderAlert allow traders to calculate several hundred standard technical indicators or customize their own.
Most popular with the pros, according to Trimmer, are a live trend line that charts price and volume over time; a color-coded momentum ranking that alerts traders to stocks' varying states of acceleration; and a news filter that produces alerts when programmed with such key words as "imbalance," "earnings up," or "revision," for example.
Trimmer notes market makers typically use just a dozen of Neovest's 700 ratios. Knight's Karsh says traders at the wholesaler use only three to five percent of its power, but will probably expand that as they grow more familiar with the technology.
"Historically, market making has never been a game of technical analysis," Karsh said. "But we've been moving this way. We started with balance sheet analysis. Now we're moving towards technical analysis."
Instructing Traders
Knight has brought in an executive from its options unit, Knight Financial Products (formerly Arbitrade), to train traders to look at the stock market technically and in terms of sectors. Teachers from Neovest's New York office also cross the Hudson twice a week to brief traders in Knight's Jersey City headquarters on such arcana as stochastics, oscillators, Fibonacci lines, and Bollinger bands.
Although these tools are typically used when placing bets on the market, or on an individual security, dealers at Knight are more likely to use the technology defensively, according to Karsh.
"We use it to avoid disaster, not to make money," he said.