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Get With the Program

Sell-side desks are giving their buy-side clients access to program-trading tools so they can slice and dice large blocks and measure transaction costs.

What's Driving the Trend?

The trend is being fueled by a number of macro-factors, including lower commissions for portfolio trades, the buy-side focus on best-execution strategies such as VWAP and the evolution of OMSs.

Prior to the development of OMSs, firms had to send lists manually. "If you've got 150 to 200 names, you're trying to fax a list to them and you're phoning a bunch of brokers to do that," says GMAM's Bodine. He uses Eze Castle Software's (ESC) Trader Console OMS to create the buy and sell lists. "ESC has the capability of delivering the orders to the brokers. Through FIX, we get periodic reports," he explains.

GMAM has other analytic systems that give Bodine the characteristics of the portfolio and will divide it by expected impact, percentage of daily volume and how it tracks the S&P 500, for instance, says Bodine. He also has tools that tell him if he is over-weighted or under-weighted in a sector.

Now that the technology and the strategy have gone mainstream, how can the sell-side broker/dealers gain a competitive advantage and offer a compelling service?

David Liles, head of portfolio trading at Bernstein, is working with his team on designing different algorithms that will determine how to execute the trades. "I think the bottom line is a lot of the core functionality that you need to at least start this business is a commodity at this point," he says. Liles, who has 10 years experience in portfolio-trading, most recently ran portfolio trading for BNP Paribas in the United States.

"Being able to receive orders via the FIX protocol and manage them and sort them and execute them in a basic fashion, is not something that we need to spend time building," says Liles. "The place where we add value is in the advanced algorithm development. We do make use of the FlexTrader toolkit, but most of the number crunching and data processing is done on our proprietary-algorithm server."

Since basket trading or list-trading has been going on for some time, brokers are scrambling to differentiate themselves through the combination of algorithms and automated-trading strategies. Andresen compares the firm's algorithms to "personal shoppers" searching for the best-execution destination. "Our decisions are made by our own algorithms that we design. Those algorithms are fed using FlexTrader to the various market destinations, like the NYSE and ECNs," says Andresen.

To secure an edge, many brokers are bundling access to OMSs with portfolio-trading analytics and direct-access-trading tools - which provide access to U.S. equities, options and electronic-futures markets.

Spear, Leeds & Kellogg (SLK), a subsidiary of Goldman, Sachs & Co., is moving in this direction. "Spear's initiative is to combine the single-share trading functionality of RediPlus with the portfolio-trading capability within TradeFactory," says Bryan Koplin, a vice president of SLK. "And trying to link this trading tool to the various order-management systems is a step in that direction. It is a unique offering."

In an effort to consolidate the number of portfolio-trading tools cluttering buy-side desks, the sell-side is now promoting these algorithms, says David Quinlan, president of ESC. "They're coming to us to build these tools into the front end of the OMS," says Quinlan.

Bodine at GMAM says he has enough tools to be effective, but he predicts that more will be available in the future. Right now, he runs his analysis on separate systems. "It would be nice to have (it) on the front of Eze Castle, get the analysis back and deliver this to a broker or a FlexTrader at my disposal, so that I could handle the trade from my machine." <<< Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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