Thomas Weisel Partners is ready to provide services to high-frequency trading shops and expects to offer filtered sponsored access to clients during the first quarter of 2010.
The San Francisco-based mid-tier investment bank has enhanced its infrastructure to compete in the high-frequency trading space. By the year’s end, TWP predicts its emerging sponsored access business could represent up to 10 percent of electronic trading revenues, said Stephen Blatney, the firm’s head of electronic and portfolio trading. He declined to offer specific projections.
"We want to compete in the high-frequency trading space and capture the stat arb and quantitative accounts on the buyside that are looking for those services," he said.
Sponsored access–which refers to a trading arrangement where a broker-dealer uses its market participant identifier to let a customer trade directly on an exchange–has grown dramatically over the past five years. According to a recent study on the subject from Aite Group, sponsored access has grown from about 15 percent of total equity market average daily volume to an estimated 50 percent in 2009.
The growth in the amount of sponsored access volume–particularly the unfiltered variety–is similar to that of high-frequency trading volume. From 2005 through 2009, high-frequency trading has seen its percentage of total ADV climb to about 70 percent of the market from just north of 30 percent, according to Aite figures. And for TWP, the numbers are too big to ignore, according to Dhiru Patel, its chief quantitative strategist.
"More than two-thirds of the liquidity in the market now is from high-frequency traders," he said, "so, we have to get into that market."
The firm is in the process of choosing a third-party vendor to provide the fast connectivity pipes for sponsored access to the exchanges. TWP would view and monitor order flow from a front-end interface, Blatney said. For the second phase, the firm would eventually have order flow move through its direct-market access infrastructure.
"The individual institutions would be getting their own market data," he said, "and we would just be that pure, fast pipe connectivity partner into the exchanges."
In either phase, TWP would ensure that a system of compliance and real-time, pre-trade risk checks–such as a notional value check, or one for "fat-finger" errors–was in place. "From a pre-trade perspective, if you were going to violate any of the checks we’ve put in place, it would suspend that order," Blatney said.
The move into the sponsored access space piggybacks on improvements TWP made to its infrastructure to augment its core algo- and portfolio-trading space. The firm has co-located in New Jersey, as well, Blatney said. The moves suggest TWP is looking far downfield at trends within its customer base.
"Some of the more sophisticated hedge funds have built more proprietary products," Blatney said. "And the only way to be a viable partner with them longer-term is to also have an infrastructure where we can do sponsored access for them when they use their proprietary algo trading tools."
While clients have been building the fast algos, they don’t have the fast networking infrastructure, Patel said. Data centers are expensive, and require periodic upgrading, he said. And clients would need to have both hardware and software operations staff to oversee all of it.
In the future, TWP may move from a third-party vendor-based partnership to one involving an exchange, Patel said. Exchanges are developing technology similar to third-party vendors that would consolidate the graphical user interfaces of each exchange and ECN connection onto one desktop, Patel said. Conceivably, users would then be able to sponsor access to the destinations, and then monitor, and apply risk checks individually, to each from one desktop.
