spent
a
lot of time
punchingkeyboards
to
work
thesystems.
Smart
order
routingtechnology represents
the
latest
advances
in
aggregationsystems.
The
technology
analyzes order flow
for
particular
patterns
of
size
and
liquidity,
ident!ir:s
attractive venues and
automatically
routesorders
forexecution. By
re-combining liquiditypoolsand allowing
the
user
to
set custom trading
rules,
aggregationproviders
hope
to
pre-empt
the
need
to
linkto
four
or
five
competing vendors.
Advanced
aggregation
systems
can
simulate sophisticatedorder
types
acrossmarket venueseven though
some
ECNs may not supportthem.
Sn'an o'derrout'rg
is still in its infancy:
according
to
the
leadingproviders
of
this
technology,
few trade
desks
have made useof anything beyond simple VWAP trading.
Broker-provlcied
aggregationsystems
are
the
most
rnridelv rrco.i h r hrrrici.lo firme fnllniriod hri inrlononrioni
oroviders
such as
Lava
and
FlexTrade,FlexTrade is also
offeredthroughsome
broKers,
Smaller aggregators
are
also
aggressive competitors,
and
together command
a
larger
marketshare
than
FlexTrade.Drilling downonfirmsize shows
a
differentpicture.
Large
firms
main
y
rely
on
the
Lava aggregation
system,followed by
FlexTrade.
Small
buyside
firms, on the
other
hand, rely
heavily
on
brokers
to
provide
this
technology.
According
to
the TabbGroup, breadth offunctionality
-
^hA ^^^+ ^^^^,^+^^
.ru
uurL
-
rEpdro,vr
the aggregation sysiem from
eachother.
Althoughsub-second speed
-
the
time
ittakes
to
get yourorder
to the
pornt
of
liquidrty
-
was
consideredcritrcal,
most buyside desks feltthat most systems
were
comoetitiveon
soeed.A
growing
number
of
brr,l:erssell
their expertisein
usino
ECNs
and
aggregation systems
to
provide
buysidetraders
agencyexecutions
without
invoking"shopping"
of
the
order
Brrvside
desks
use
these
firms
to
become
active
users
of
aggregation
and
access
technology
without
investing
timeand
money.
Firms
like
PulseTrading, White Cap Trading, Firefly,UNX and others
have
experiencedgood
volumegrowthin
the
Plexus Broker
Universe over thelastfewyears.Other
firms
in
this space
are
EGS, Electronic
Specialist,
EquityStation, Terra Novalnstitutional.
Vie
Financial
and Paravane
Partners.
Algorithmic
Trading
Algorithmic trading systems
model
the tradingrules
and
logic
of
different tradingstrategies and
implement
themodels
via
FIX
connectivitv.
The svstems offered to
thebuyside
trading
desks are
fairly
new, butpenetrationhasbeen
broad.
Both
the
Tabb Group and
the
Plexus survey
found
that
60%
of the
desks
use
algorithmic
tradingsystems,
with the
percentagesoaring
for
large
firms
to
80o/o.
The basic strategyofthese systemsisstill crude:
"sliceanddice"
the
orders downto
the size
being
shown
in
the
order
books.
The
widespread use of automated
trading
stratagems
such as
probe
trades
and
other
devices
to
test
the
tenor
of
the
market
still lies
in thefuture.Modelingtrading strategies, even
a
basic VWAP strategy,isnotan easy task.
The
best algorithmic
trading
systems
have developed much broader capabilities than
a
basicVWAP
model,
but the
vast
majority
of
users
still
use onlythe basic model. The main use
of
these systems
is
for
the
fairly
liquid,easy to
trade
orders
where
little value
can
be
addedby more
humanattention.As wasthe case for aggregator systems, brokerprovided
algorithmic systems dominate
the
marketplace.
CSFB,
Goldman Sachs and
ITG
are thecurrentleaders.
CSFB
has
a
big
presenceamong
the
large
and
medium
size
firms
and
ITG
mainlyamong
medium
size
firms.Proprietarymodels
and
FlexTradewere
the
non-broker
systems
with the largest
percentage
of
users.
Thegoal
of
traders using
these
systems
is
to
eitherreducecosts or
improveefficiency.A
few
have
started
to
analyze
the
results
from
their algorithmicsystem and
are
oftennot
pleased
with theresults. Plexus
hasevaluated
the
results
of
naive VWAP enginesversus
PAEG/L
and
also
found
poorer
than expected
results.
Conclusions
The
relationshipbetween buyside
trade
desks
andbrokerage
firms is
in
the
process
ofredefinition.
Indeed,
today's markets operate radically different than they
did
three
or
fouryears
ago.
The
idea
of
"relationships"being
the
gravitational
forceholding
together
buyside trader and broker
is
weakening.
Changes
in
market
structureand
order-handling
rules
allow
the
buyside desks
to
takemorecontrol
of
their
orders. The days
when
brokers controlledmarketaccess
andmarket
information
appear
goneforever.
This
will
not begood
news
for
brokers who rely
on
little
more
than
relationships
for the
securing
of
order
flow.
With
more
trading
being done electronically
or
through
direct
floor
access,
the
remainder
of
the
pie
is
getting
thinner.
We
predict
thatmany
brokerage
firms will
seek
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