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FROM THE SIA SHOW: Measuring Transaction Costs Before the Algorithm Trades

Today, Spear, Leeds & Kellogg (SLK, booth #3000) will demo pre-trade transaction-cost analysis (TCA) as part of its REDIPlus Release 4.2, a new version of SLK's direct-access trading platform with algorithmic trading strategies from Goldman Sachs.

Today, Spear, Leeds & Kellogg (SLK, booth #3000) will demo pre-trade transaction-cost analysis (TCA) as part of its REDIPlus Release 4.2, a new version of SLK's direct-access trading platform with algorithmic trading strategies from Goldman Sachs. The new feature, known as The Guide, allows a trader to graphically see and control how fast or slow a particular algorithm will execute the order and how much that will cost or move the market, SLK says.

"We've taken the concept of algorithms to the next level," says Greg Tusar, managing director and head of product development at SLK, who stresses that the ability to depict how the algorithm will work before a trader submits the order is a key functionality. "Being able to see the transaction cost for different levels of aggression is really the innovation." A trader can set the risk preference -- the user's assessment of volatility for a stock -- from one to 10, and enter the start time and order size, he explains.

"When you key-in an order to trade 100,000 shares, you can go through all 10 risk preferences. You can see which one suits your time frame for executing the order and you can see what your estimated cost is," Tusar says.

The Guide works hand-in-hand with the 4Cast algorithm -- based on the concept of implementation shortfall -- which develops a schedule for executing the order without moving the market and impacting price. "4Cast comes up with a plan to execute the order. If it sees liquidity in the market, it will alter the plan to execute the order faster," explains Tusar. It is one of four algorithms that the Goldman Sachs Algorithmic Trading (GSAT) group provides via REDIPlus. GSAT is a team of 20 to 25 people around the world who have expertise in financial engineering and logistics, such as how orders work on the New York Stock Exchange.

A second new feature of REDIPlus Release 4.2, known as Spread Trader, automates pairs trading -- the ability to trade two stocks at once -- by taking long and short positions that are dollar neutral. In merger arbitrage, hedge funds typically use this strategy, though institutions could use it if they thought one stock would outperform another, such as IBM versus Microsoft. Spread Trader was previously a function of the stand-alone application TradeFactory, a portfolio-trading system, which SLK acquired when it acquired brokerage firm TLW in 1999.

According to Tusar, SLK plans to expand into Asian markets later this year. He notes that the next piece of functionality added to REDIPlus will be some post-trade analytics.

Meanwhile, SLK is facing competition from FlexTrade Systems and Portware (booth #4513), which have become major players in program trading and algorithmic trading. Both platforms offer transaction-cost analysis and pairs trading, and both software firms market themselves as broker-neutral platforms, though other sources in the vendor community point out that REDIPlus is affiliated with Goldman Sachs.

Tusar says REDIPlus is a multi-broker platform. "Through these tools you can direct orders to other brokers," he says, noting that firms use the Financial Information Exchange (FIX) protocol to reach other brokers via REDIPlus. "We are a central location that is destination-neutral, so [clients] can go to other brokers or exchanges. That is the strategic direction for us," he adds. In fact, traders who use either FlexTrade or Portware route orders through REDIPlus, says Tusar, who notes that those systems are better suited for traders that want complete control over their executions and to write their own rules.

Sang Lee, manager of the securities and investments practice at Celent Communications, says that REDIPlus has been "overshadowed" by other portfolio-trading platforms. Goldman "is playing catch-up," he says. "They are trying to reestablish themselves in this marketplace. There's been some confusion as to what REDIPlus is capable of. For a long time REDIPlus has been thought of as a front-end to REDIBook." SLK sold REDIBook, an electronic communications network (ECN) to Archipelago (booth #3115) five years ago, after Goldman acquired SLK.

SLK executives say providing a smart order-router and connectivity to destinations is no longer enough. "We want to be the premier execution platform. We want to be a one-stop shop for any strategy or destination," says Adam Mazur, vice president, responsible for the SLK execution product. <<< 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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