Jonathan Beyman is chief of operations and technology at Lehman Brothers, as well as an executive vice president. In addition, Beyman has served as the firm's CIO since 2000.
Question: Is Lehman Brothers offering pre-trade analytics and/or algorithmic trading to its buy-side clients? If so, what are the technology challenges and the benefits associated with these offerings?
The short answer is, yes, we certainly do. These days, it's an absolute requirement in dealing with much of the buy side. We have been offering out pre-trade analytics across a variety of asset classes for years, first via private network connections and market data providers, and later through the Internet.
Algorithmic trading is a much more recent battleground that, at least at Lehman, is still confined to the equities markets, though not just in the U.S. Offering it to customers represents a convergence: What began as taking in order flow electronically but executing in the traditional manual way - and using high-end analytical models in-house only - has progressed to allowing customers to access and utilize these models to generate and execute the timing and sizes of orders automatically. Lehman provides access to models through a variety of channels. These models allow buy-side accounts to employ a variety of trading strategies to achieve goals varying from improving average execution price, to balancing the speed with the impact on a stocks price, to executing paired trades with user-specified spread relationships.
The benefits in providing this capability for Lehman have been to expand our market share globally and our footprint with the customer segments that we have been targeting: big institutions and hedge funds. Providing these services are of low marginal cost to us, once developed, and are profitable. Their use also has led to an expansion of higher-margin businesses, such as volatility and exotic products. The challenge is that this is clearly an area where many firms are competing - which requires a significant and ongoing investment in developing better algorithms and the platforms to execute with almost no latency, and to scale to handle significant volumes on many different exchanges around the world. It's why this area is considered to be the hottest technology "arms race" on the Street today! -Jon Beyman