CIBC World Markets Private Labels BAS’s Algorithms

With buy-side customers pushing the sell-side to offer algorithmic trading, CIBC World Markets decided to white label another broker's electronic trading platform.

Rather than develop its own quantitative models and connectivity to trading destinations, CIBC World Markets scanned the competitive landscape of brokers offering algorithmic trading and direct market access and opted for the service-bureau model.

CIBC was adamant about finding a broker to act as a pure technology service provider -- one that would not require CIBC to trade in the other firm's name. As a result, CIBC entered a relationship with Banc of America Securities (BAS).

According to Bruce Turner, head of U.S. equities trading at CIBC World Markets, they chose BAS for several reasons. "No. 1, they had an established product; No. 2, they were willing to deal with us in the ASP [application service provider] model; and No. 3, we knew the people."

Since the first quarter, CIBC World Market's Global Electronic Trading Services (GETS) team has been rolling out access to algorithmic trading strategies -- hosted and maintained by Banc of America Securities -- to all of its buy-side clients, including quants, hedge funds and mutual funds.

According to CIBC officials, BAS was the only firm both willing and technically able to allow CIBC to take credit for the order flow. "All the trading attribution to the exchanges falls under CIBC which is different than some of the players in the algorithmic space," says Matthew Weitz, executive director, equities sales and trading, GETS at CIBC World Markets.

CIBC gets credit for the volume because BAS's service bureau can handle multiple mnemonics, which is the entering firm's identifier on the New York Stock Exchange, or the MPID (market participant identifier), which is the ID used on Nasdaq.

"Over our service bureau, I'm appending CIBC's ID on those exchanges on every transaction, and that's how the exchange knows it's them," says Rob Flatley, managing director, electronic trading services at Banc of America Securities. At the end of the day, BAS packages all the regulatory reporting for CIBC.

To pull this off, CIBC had to integrate with Sungard BRASS, its sell-side order-management system, so that CIBC sales traders can use the BAS algorithms on behalf of customers within their existing workflow and ticketing applications. Whether buy-side customers interact with CIBC through its trading desk or use the algorithms on their own, "The downstream integration [had to be] seamless to our customers," says Weitz. BAS also had to integrate its execution platform with CIBC's middle- and back-office reporting system. During the day, CIBC is receiving real-time drop copies [of trades] in FIX (Financial Information Exchange) format, so that CIBC stays current on the activity running through the servers.

With algorithmic trading, thousands of trades have to flow back into middle- and back-office systems for credit risk, regulatory reporting and clearing and booking accounting systems, Flatley explains.

In addition, there was a lot of integration specific to allocations via the Oasys/Omgeo world through its ADP back office, says Weitz.

Like a true technology player, Turner says BAS is maintaining the servers for CIBC. The orders do not go to BAS's trading desk, emphasizes Turner. The orders go through algorithms, are sliced up and then executed via different destinations, including Nasdaq, electronic communications networks (ECNs) and the New York Stock Exchange.

"We're not using BAS as a trading destination. We're using them to maintain and house servers and sell us software that, in this case, has been labeled algorithmic trading," says Turner. From BAS's standpoint, "It's a win-win for us to make the pie bigger," says Flatley, whose firm collects on a small transaction fee based on the volume flowing through its pipes and models.

In the past two years, Flatley's group has built what he terms a ConEdison plant and currently has seven clients in its so-called AlgoConnect program with CIBC being the largest. Having acquired Vector Partners, a specialist in algorithmic, program and portfolio trading in 2003, and Direct Access Financial Corporation, a provider of direct market access technology in 2004, BAS is able to private-label DMA to the desktop, as well as provide access to its algorithmic-strategy servers.

"I'm the guy with the screwdriver and the electricity," says Flatley. To distribute its algorithms, BAS has integrated its platform with 22 buy- and sell-side order-management system providers.

To the end customer, "It appears that CIBC has done all the integration," says Weitz. Adds Flatley, "We don't charge our AlgoConnect clients for the upfront work to build the integration. Our success is tied to their volume. The more volume they do, the better we do," he says.

Because CIBC has a large Canadian franchise, the firm is cross-selling the service across the Canadian border for U.S. equities. In the future, it plans to offer algorithmic execution for Canadian equities, says Turner. 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