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Get With the Program

Sell-side desks are giving their buy-side clients access to program-trading tools so they can slice and dice large blocks and measure transaction costs.

Sell-side desks are giving their buy-side clients access to program-trading tools so they can slice and dice large blocks and measure transaction costs.

One of the new inventions sold on cable television is The Ultimate Chopper, a compact food processor that chops, slices and dices anything. Moving from food to finance, one can argue that sell-side program-trading desks - slicing and dicing large baskets of stocks into smaller pieces - are Wall Street's version of The Ultimate Chopper.

But program-trading tools are no longer exclusive to sell-side firms.

With buy-side institutions taking more control over their order flow, sell-side firms have no choice but to roll out program-trading tools.

When George Bodine, director of trading for General Motors Asset Management, (GMAM), the New York-based pension-plan sponsor - with $100 billion in assets under management - fires an investment manager and hires a new manager, he ends up creating a list of stocks as part of the process of transitioning to the new portfolio. "We bundle a bunch of assets in a program trade. It gives us a much more competitive rate, commission wise," says the buy-side trader.

Program trading is a growing trend in U.S. equities that has been on the rise for a couple of years. Utilizing various pre-assigned criteria and methodologies, program trading is the execution component of portfolio trading - a strategy associated with matching or beating a benchmark. The most popular benchmark is volume-weighted average price (VWAP) - where brokers execute trades in small increments throughout the trading day.

Instead of executing block orders (10,000 shares and higher in single stocks), buy-side institutions transmit lists of securities through their order-management systems (OMS) to the sell side. One reason for breaking up the orders is to avoid moving the market. Also, firms have to carve up their orders because average-trade-sizes have decreased since the advent of decimal pricing because there's less liquidity displayed at each price point. If a buy-side firm has 75,000 shares of a stock to trade, but the stock historically trades 200,000 shares a day, it has to break up the order.

Brokers, in turn, take the buy-side instructions and run these lists through different algorithms, also known as rule-based systems.

Last summer, Sanford C. Bernstein went live with FlexTrader, a customizable system with pre-defined trading strategies for lists and single-stocks. The system was developed by FlexTrade Systems of Great Neck, N.Y.

Rather than build the infrastructure from scratch, Bernstein, an agency-brokerage firm, is using FlexTrader for its trade-management and list-handling capabilities. "The first reason you want to be in this business is because your clients are in this business," says Matthew Andresen, head of global trading at Bernstein. "If you are going to offer them a compelling trading service, I think you must be in this business," he adds.

Based on data from research outfits such as Stamford, Conn.-based Greenwich Associates, more than 50 percent of institutional clients engage in program trading and over half the commissions go to program trading, estimates Andresen. He believes the trend is going to become more pronounced.

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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