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Katherine Heires and Kerry Massaro
Katherine Heires and Kerry Massaro
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2006's Innovative Algorithms

The onslaught of new algorithms can leave traders wondering which end is up. Advanced Trading gets the latest from several algorithm providers.

From the Jan-Feb 2006 issue of Advanced Trading

Much has been written about the growing number of algorithmic offerings being touted by both sell-side and technology shops on Wall Street. With new products flooding the market, it has become a daily challenge for the buy side to differentiate among the many algorithm offerings.

Buy-side traders may be left guessing what's in store and wondering if the industry has seen the limits

of innovation in algorithms. But experts say the innovation thus far is just the tip of the iceberg. "At the end of the day, this is a marketplace that is still in its infancy, and the real challenge is to prove to your customers that your particular algorithm is better than your neighbor's," says Gavin Little-Gill, senior analyst in the investment management practice at research firm TowerGroup.

In an effort to achieve some clarity in the ever-expanding algo universe, Advanced Trading asked a number of firms to identify the one algorithm on their 2006 rosters that they view as the most innovative or noteworthy.

Banc of America Securities - Arrival Price Algorithm

According to Rob Flatley, managing director of electronic trading services (ETS) at Banc of America Securities, the latest iteration of the BAS Arrival Price algorithm is the firm's most notable algorithmic offering to date. He says this is due, in part, to the rapidly growing interest in arrival price algorithms, a trend that Flatley expects will continue to grow in 2006.

"Arrival price algorithms meet the objective of more and more funds," Flatley says, pointing to a value fund trying to get the best return to the investor in a specific time frame and circumstance as an example. Such algorithms are built to optimize on the price of the stock at the point you make the decision to trade, and, as a result, produce better outcomes for a value fund than would benchmark algorithms that look at the relative midpoint based on volume of the day, he explains.

Flatley also touts the involvement of Robert Almgren, a respected researcher in the algorithmic trading arena and co-author of two influential white papers on the topic. Almgren was actively involved in the recent upgrades of BofA's arrival price offering, Flatley notes.

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