Larry Manley, a hedge fund manager with Manley Asset Management of Chatham, N.J., has found a way to save on trading costs, specifically on those days when his trading strategy involves the use of more than one algorithm offered by two or more sell-side firms. His strategy? He trades through Electronic Specialist (ESP) of New York, one of the new algorithmic trading aggregation hubs that offer central clearing services, which are now offered by several registered broker-dealers.
"It's an efficient method for us and gives us far more flexibility in the way we trade," Manley asserts, noting that particularly on those days when he does not have a clear opinion on the overall market trends, he likes to be able to cherry-pick one or two algorithms from different sell-side firms. Manley says he usually chooses a more aggressive algorithm for the beginning of the day and a slower-paced algorithm for the remainder.
Offering More Options
Algorithm aggregation "offers the best of both worlds," according to Manley. The providers of these hubs offer not only access to a cross-section of highly valuable algorithms from multiple sources, he explains, but also, in the case of ESP, he can choose either anonymous or attributed trading with the sell side. Then, at the end of the day, Manley gets a single, consolidated ticket from his broker-dealer and, as a result, lower closing costs.
Manley is part of a growing audience of buy-side traders and analysts testing and assessing these services. Some are singing their praises because of the cost savings the services can provide, but others question their true value and viability over time.
Within the past year, independent agency brokers and DMA aggregators such as ESP, Firefly Trading (Boston) and UNX of Burbank, Calif., have begun offering an array of algorithms from multiple sell-side firms for their buy-side clients. The first to market was ESP, which now offers more than 100 algorithms from 20 sell-side firms to more than 40 buy-side customers.
The Demand Is Out There
Jeromee Johnson, a senior analyst with TABB Group (Westborough, Mass.), is not surprised by the market's interest. Johnson has intimate knowledge of the services being provided as he joined TABB Group from UNX, the newest player in the field. "There are clear-cut dollar savings associated with the use of these services," he says, explaining that the top 10 asset managers conduct high volumes of algorithmic trades daily so the service makes sense for them.
Johnson explains that if a large asset manager can pay $12 for a consolidated trade instead of $50 across five brokers, over time they can save a great deal of money. "These [costs] add up, and there can be significant savings involved, ... potentially in the millions." But that may be only for a large asset management firm. Johnson questions the usefulness of such services for small to mid-size trading firms. Depending on the volume of trading conducted, there may not be significant cost savings.
Another key advantage for the buy side specifically is that ESP, UNX and Firefly can offer various levels of anonymity to traders - the sort of option you don't get when you access algorithms through an order-management system. This results in the option to give or not give information about trades to a sell-side broker.
The Same, But Different
Of course, there are subtle differences and different stages of development among the three providers.
Richard Holway, managing director at Firefly Trading, says his service offers an easy-to-use, front-end EMS (execution management system) called ORION, which includes access to the service's central clearing capabilities. He emphasizes that the system provides a standardized user interface to control the various parameters of each algorithm, ECN and alternative trading system (ATS) made available by four major partners - including Bank of America, Merrill Lynch and Piper Jaffray.
There are major benefits to working with an EMS with consistent controls across a variety of venues, says Holway, such as risk reduction and the reduced time it takes a trader to get up to speed on the use of the system. "If you don't have a consistent control interface, it is too easy to click in the wrong place, a dangerous thing to do on a trading desk," he says. Currently, Firefly has attracted 25 clients, and it expects that number to reach 35 by the second quarter.