With buy-side institutions increasingly interested in portfolio trading, Pulse Trading - a Boston-based electronic broker - hired a team of experienced traders to launch a portfolio trading group(PTG) to develop different algorithms that buy-side institutions can use to measure their trading costs in real time.
"We're working on coming up with different algorithms or mathematical formulas that we think our customers will find interesting on an agency basis," says Mark Enriquez, chairman of Pulse Trading.
Institutional investors are increasingly using portfolio trading, also known as program trading and basket trading, as a computer-guided methodology for trading lists of different securities.
It's a sign that buy side traders are using direct access brokers to help them benchmark their portfolio trades against statistics such as volume-weighted-average price or VWAP. Enriquez says the increase in portfolio trading is also being fueled by a mandate from the Securities and Exchange Commission and AMIR to demonstrate best execution.
"Another thing the buy side is demanding is to see individual execution reports and across a basket that can be thousands. You can be getting a boatload of executions coming back electronically," he says.Rather than develop their own technology, the new service, branded as PulsePTG, will utilize the FlexTrader global trading and order management system from Great Neck, N.Y.-based FlexTrade Systems. FlexTrader provides direct access to major sources of liquidity including 65 global brokers, exchanges and electronic communications networks (ECNs).
"We are technology agnostic. We sell our expertise in using any and all systems," says Enriquez, who says the firm will route orders to listed exchanges as well as ECNs. Pulse began using the Flex Trader system six months ago to do basket trading. "What's new for us is hiring a dedicated team of very experienced people to focus only on trading the baskets," says Enriquez.
The team consists of James Willsey, executive vice president and director; Alexander Bonello, senior vice president and head trader, who will both be based in New York; and Richard Holway, executive vice president and director, sales & marketing, located in Boston.
Willsey, who has an extensive program trading background from CS First Boston, D.E. Shaw & Co., Bear Stearns and JP Morgan, most recently work with Bonello on the program trading desk at Knight Securities. Holway was the founder and principal of Harorside+, a securities firm formed in 1998 specializing in block trading and was director of trading at Investment Advisers, Inc. from 1990 to 1998.
Pulse made its name in the last few years by trading individual names on ECNs and studying each ECNs algorithms to figure out where to trade certain stocks. Now, says Enriquez, "We're trying to codify these individual-name-experiences into a basket trading strategy to meet the client's objective - whether they're benchmarked to the VWAP or the (market) close, or they might have illiquid names they specialize in dealing in." The team will pull out the most illiquid names from the baskets and trade them manually, he says.
"If you're going to be an institutional broker/dealer, you have to be in this space now because so much of the flow is going through this business," says Enriquez. According to a recent study by Greenwich Associates, portfolio trades now account for more than 40 percent of share trading volume at more than 100 of the largest North American institutional investors. These include investment management firms, quantitative funds, hedge funds and pension funds.
There are two main reasons driving the trend, says Greenwich Associates Consultant John Feng. First, there are pressures on the buy side to lower trading costs. At 2.5 cents per share for large users in the U.S., the cost of portfolio trading is less than half the 4.5 cents per share that firms pay for a regular stock trade. Second, portfolio trading provides a nimble and flexible way for fund managers to transfer in and out of sectors or geographical markets.
Though basket trading has been going on for a long time, direct-access trading has made it easier. "Rather than calling up a person on the sell-side and going through a long list of orders, increasingly the buy-side can transmit an order electronically," says Feng. "What the sell-side is doing is trying to make this a low-touch business, so that an algorithm or a computer can take care of a trade." 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