No More Headaches, Just Alpha

For some U.S. fund managers, trading globally is not an option. Setting up a 24-hour trading desk in the U.S. to trade in real time internationally is not a paltry undertaking, nor is setting up local branch offices around the globe. To that end, Instinet, a global agency brokerage, is offering an alternative solution to small hedge fund clients that want the benefits of international trading without the headaches.

Enter: InstinetAlpha, a trading operation that will be launched in London during the second quarter to which buy-side traders can outsource their international trades, according to Tony Mackay, president and managing director, Instinet Europe. "We are a broker that can take 100 percent of that order flow and pass it on for execution," Mackay says. "The benefit is real-time trading without the cost of setting up a desk," he adds.

Mackay explains that rather than give the international orders to one broker for execution, the client can determine which firm it wants to execute the order. "The trader can tell us, 'Here is what I want to trade overnight - take the order flow and trade it,'" he continues. "If the client wants it executed by Goldman or Lehman or another broker, we do whatever the asset manager wants."

Although the operation is not off the ground yet and traders still are being hired, InstinetAlpha already has a proven business model - Instinet launched a similar operation in Hong Kong last summer. Mackay admits that when the operation first launched in Hong Kong, the concept was met with skepticism by competitive brokerage firms. After all, why would a brokerage firm route their orders to a competitor?

Mackay explains that the operation is set up with a separate management team than Instinet brokerage and that there is no crossover. In addition, he emphasizes, "Instinet has an unconflicted business model - we don't trade for ourselves, so there is no conflict." He adds, "Now, with what we've been doing in Asia, it has gained acceptance and the relationship has really worked well."