As buy-side firms take more control over executing orders, there is an increasing interest in algorithmic-trading strategies combined with direct-access trading platforms.
"It's a very important movement in the marketplace," says Robert Moitoso, senior vice president, Global Transaction Services at Thomson Financial (booth #3200). "The number of traditional block trades is dwindling, the number of executions is increasing and they're chopping up orders more," he says.
According to a recent report by The Tabb Group, "Institutional Equity Trading in America: A Buy-Side Perspective," these trading models analyze a security's trading pattern and the trader's aggressiveness and translate the data into a series of orders that are fed in the market as surreptitiously as possible.
The trend is evident at today's SIA Technology Management Show and Conference, where several major players in the program and algorithmic trading space " Portware (booth #4513); Newport (Instinet, booth #1405); and REDIPlus from Spear, Leeds & Kellogg (booth #3000) " are displaying their wares. These platforms have been dubbed execution-management systems because they help traders interact with the market more than traditional order-management systems.
Today, Portware is introducing a service bureau, called Portware ASP, that will pre-package access to algorithms, including those of brokers, along with market data and direct access to destinations. "[We] go best of breed," says Eric Goldberg, Portware's chief executive officer and a former trader, who adds that clients can choose the market data and the types of algorithms they want and be up and running within an hour.
The application service provider (ASP) will "appeal to smaller and mid-size clients that want to have access to the robust trading functionality as well as the direct-market access and algorithms in a well-presented desktop," says Ary Khatchikian, president and chief technology officer of New York-based Portware.
But now, direct-access trading platforms such as Lava Trading (booth #2501) and Sonic Financial Technologies (now BNY Brokerage, booth #4012) are interfacing with these platforms as hedge funds and buy-side traders demand more control over their order flow by using smart-order routing tools and other execution strategies.
One force fueling the algorithmic trend is the complex market structure in U.S. equities. "Buy-side and sell-side firms are being mandated to get best execution at a time when the markets are fragmented," says Duncan Niederauer, cohead of global clearing and execution services at SLK. With potential changes to the market structure evolving " such as, "What is a fast market versus what is a slow market?" " Niederauer says buy- and sell-side firms "better have powerful technology" to navigate the equity markets. Underlying the interest in algorithmic trading is the emphasis on maintaining, controlling or reducing trading costs, says Sang Lee, manager of the securities and investments practice at Celent Communications. "While there is a focus on saving in terms of trade execution, [hedge funds and buy-side] firms are trying to make money on these trades," Lee says. "The main reason is, you're taking a certain strategy that you've created and you're implementing it to make money."
As the interest in algorithmic trading grows, brokers are using the broker-neutral software platforms, like Portware and FlexTrade, to distribute access to their algorithms to institutional clients. In Portware's case, a hedge fund or quantitative analysts can write their own algorithms and distribute them through the system, or they can use a broker's existing algorithm.
Meanwhile, direct-market-access brokers like UNX and Sweden's NeoNet Securities are interfacing with the algorithmic platforms as well. "We're agnostic to whatever front-end or algorithm or black-box model you use to prepare the order. We'll just be the execution vendor," says Peter Kearns, president of NeoNet Securities. Right now, NeoNet is in the process of connecting to Portware Professional and FlexTrade's FlexTrader via the Financial Information Exchange (FIX) protocol at the request of a customer. "We're trying to push our data feed into these vendors," Kearns says. One edge NeoNet can provide is market data, he adds. "We have the fastest quotes in Europe," he claims. "Our quotes are faster than Reuters or Bloomberg, so people want our data in the Portware front-end."
Market data is driving some of the partnerships between the algorithmic-trading platforms and the direct-access systems because of the speed of the direct-access systems' pipes. For example, Portware formed a partnership with Lava Trading. "Not only do we have a built-in screen to capture some of their trading strategies, we also now support Lava market data through our system," Portware's Khatchikian says. "If a client is doing business with Lava, Lava can redistribute Portware and give them Lava market data." For those buy-side traders who care about VWAP (volume-weighted average price), market data "can help them achieve the VWAP pricing," says Richard Korhammer, Lava Trading's CEO. "It's where everything begins."
So how big is the market for analytical trading " and is it here to stay? "It's safe to say it's growing and it will have its place in the market," Korhammer says. "Traders who purchase VWAP and other analytical traders may be viewed as passive money managers," he says. "I expect there will be a demand for both passive and active trading strategies." 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