December 11, 2013

With the rising cost and complexity of trading infrastructure, Morgan Stanley is offering systematic managers that use black box and quantitative trading strategies a comprehensive end-to-end solution.

Ari Kaplan, Morgan Stanley
Ari Kaplan, Morgan Stanley

The service leverages the broker's relationships with data centers, exchanges and network providers to help quantitative firms speed up the time it takes to start trading.

"The new offering is able to solve a lot of technical problems," says Ari Kaplan, managing director and global head of quantitative client facing business for Morgan Stanley Electronic Trading (MSET). "Basically, if you are starting a new strategy, Morgan Stanley can counsel a firm on the technology infrastructure necessary to get up and running and help put in place the right technology suite," explains Kaplan in an interview at the firm's New York offices.

The offering, focused on US cash equities, sits as a new bundle of services within MSET's Quant offering. Because the firm has a "large footprint" with systematic managers, the firm built out the offering based on client feedback, says Kaplan

"In the U.S. there are 13 exchanges and numerous protocols," notes Kaplan. Firms that want to trade with all the exchanges would need to normalize the protocols on both the market data and order routing side. From the client side, instead of taking six months to get up and running, Kaplan says Morgan Stanley can shorten this part to two to three weeks.

"The significant amount of technical resources involved in creating a comprehensive end-to-end trading solution can impede a client's expansion into other markets and asset classes," says William McGeough, executive director and North American head of quantitative client facing business for MSET. "This new technology offering helps clients avoid the potential lost opportunity costs if these tools were built in-house," says McGeough who adds that Morgan Stanley has "taken a significant amount of complexity down to a simpler form," he says. "The fact that they can offload these services to Morgan Stanley alleviates some of the technical burden in creating a high- performance trading system and allows these clients to focus their energy on trading and alpha generation," emphasizes McGeough.

Leveraging Existing Relationships

Systematic institutional managers include quantitative managers and primarily hedge funds, CTAs to a small extent and broker dealers with a medium and long-term view in terms of turnover of trades. The firm is also catering to startups that leave banks or established hedge funds to start new hedge funds. "They are resource constrained and see the value in leveraging the established relationships that Morgan Stanley has in place," says Kaplan.

The move is a sign that brokers are looking to leverage their expertise and technology infrastructure in ways that can boost revenues. "Equity trading is a low margin business. Right now volumes are down, so how do you increase the order flow through your pipe?" comments Robert Stowsky, senior analyst at research firm Aite Group."It's basically trying to make this as easy as possible for a start-up proprietary fund or hedge fund. If they come to you and get all this running, that is order flow going through your firm," says Stowksy.

The outsourced offering combines Speedway, Morgan Stanley's low-latency trading infrastructure, with market data, colocation services, normalization of exchange data protocols and all the other components that systematic managers need to run their trades and strategies. "Each manager would assign a different value to each of these components," explains McGeough. For example, one client may place greater value on Morgan Stanley's risk GUI) and tick history than colocation and high-speed market data due to longer time horizon.

[For more on Morgan Stanley Revamps Trading Platform Ahead of ‘Naked Access' Ban , see Ivy Schmerken's related story.]

MSET's offering will operate from all four of the US equity exchange data centers in New Jersey: NYSE ARCA (NYSE) Mahwah, Nasdaq (Verizon) Carteret, BATS (Savvis) Weehawken and Direct Edge (Equinix) Secaucus. Morgan Stanley has a presence in each of those data centers.