Demand high for overseas electronic trading

Hedge funds, and increasingly pension funds, are using electronic trading firms that offer direct access to securities markets around the world to enhance asset diversification, boost returns and keep trading costs low.

Investors seeking direct access to markets in other regions is "absolutely a significant trend we're seeing," said Peter Kearns, president of NeoNet Securities, New York, an agency broker that offers both electronic access to and traders for about a dozen markets around the world.

He said investors are looking for direct access to global markets to control order flow, cost and quality of execution, and hedge funds are leading the charge, although other institutional investors are also expanding their universe.

Michael Plunkett, president, North America, for Instinet, the New York-based electronic broker, said cross-border trading at his firm is spread fairly evenly among traditional asset managers and hedge funds, but that larger pension funds also typically do some global trading.

He said pension funds often get interested in international trading when moving assets from one manager to another. On the hedge fund side, he said, larger funds have their own trading desks overseas and handle that trading internally.

Overall, interest in global trading has picked up.

Francois Michaud, principal and chief investment officer of Reno, Nev.-based Right Hedge Investments LLC, trades U.S., Canadian, German and French stocks as well as German bonds.

"We're a global macro fund with special emphasis on time diversification, and we invest in different types of trading methodologies spread over different timeframes," he said. "We needed a prime broker that was able to give us good rates but also extremely efficient execution."

He turned to Interactive Brokers LLC, Greenwich, Conn., an electronic trading platform that provides direct access to markets in Australia, Belgium, Canada, France, Germany, Hong Kong, Italy, Japan, Korea, Netherlands, Spain, Switzerland, the United Kingdom and the United States.

By using Interactive Brokers, "if I need to adjust a position overnight or if I decide to sell the German market, I can do that immediately," Mr. Michaud said. "Or if I wanted to cover a short on IBM because of sudden news after eight o'clock at night in the U.S., I can cover that position in London."

Steven Sanders, managing director of marketing and business development at Interactive Brokers, said interest in cross-border trading has increased, but mainly from overseas investors looking to trade in U.S. stocks.

"If you are someone sitting in a smaller market, having a broker give you access to the U.S. is a wonderful thing," he said. "And being able to do it at low cost — a huge opportunity has been opened up for that customer."

Still, he said, U.S. investors are beginning to expand their horizons and look for opportunities overseas.

"Americans seem to be more isolated than their counterparts overseas, although people are now changing their thinking," he said. "Going forward, if you want to make a good return, you're going to have to consider overseas markets."

Mr. Kearns at NeoNet, which is a unit of Stockholm-based NeoNet AB, said upward of 70% of his firm's business is from European clients trading in other European markets, but the percentage of U.S. clients trading internationally has increased.

"There's been a significant pickup in U.S. trading into Europe," he said, adding that improved market conditions have led more U.S. investors to move more investments outside U.S. borders. U.S. stock valuations have also played a role.

"With valuations so rich in U.S. markets, investors are looking globally for value, so we've noticed some value fund players really going to Europe and looking over there for opportunities," he said.

NeoNet, which currently offers access to the New York Stock Exchange, Nasdaq, the American Stock Exchange and markets in Amsterdam, Brussels, Copenhagen, Frankfurt, Helsinki, Lisbon, London, Madrid, Milan, Paris, Oslo, Stockholm and Switzerland, is considering expanding to Asian markets.

Instinet offers access to 40 markets around the globe, including markets in Asia, according to Mr. Plunkett.

"Theoretically you can be trading 24 hours a day," he said, adding that the firm has trading desks in Hong Kong, London and Tokyo — as well as New York — for investors who want their orders handled by traders rather than electronically.

Triglobal Wealth Management, Montreal, a unit of Canadian financial services firm Triglobal Group, uses Interactive Brokers to trade U.S. stocks, but Mario Bright, Triglobal president, said access to European markets provides new opportunities.

"Interactive Brokers' expanding base of products to include European markets opens the door to opportunities we never had before," he said.

"These markets were accessible to us before, but not with the ease of accessibility offered by Interactive Brokers."

Indeed, cross-border trading is nothing new, but investors using services like Interactive Brokers, Instinet and NeoNet say using global broker-dealers can be difficult.

"The problem with the major Wall Street firms is that they are highly departmentalized," Mr. Bright said. "Execution, accounting, back office and compliance are all different departments that we would need to deal with on a daily basis."

At Interactive Brokers, he said, all those functions go through a single point of contact, making the cost lower.

Other global investors, like Kristian Wiermyhr, who runs the hedge fund Predator Global Macro Fund out of Oslo, Norway, pointed to potential conflicts of interests that major broker-dealers might have.

"Some customers want to talk to a broker for comfort or advice" but risk giving the broker too much information, said Mr. Wiermyhr, who trades European futures and options through Interactive Brokers. "There are not many brokers worth talking to. It's better to be on your own."

Mr. Kearns at NeoNet said many buyside institutional investors are concerned about conflicts of interests, which gives his firm a leg up: "The fact we're neutral and we have no axe to grind is a big plus."

In addition, by owning memberships to the various stock exchanges, NeoNet can assure investors that their orders are not being handled by a local middleman, he said.

Those potential drawbacks are not stopping competition from broker-dealers, however.

One of the stiffest competitors is REDIPlus from Spear, Leeds & Kellogg LP, a unit of Goldman Sachs & Co., New York. The REDIPlus system offers direct market access to 13 European exchanges, including those in Amsterdam, Brussels, London and Paris.

"Our competitors come from all different areas," said Mr. Kearns at NeoNet, citing investment banks as well as local brokers in each market.

"Almost all firms are moving in this direction," he said, which suggests that pension funds and hedge funds should be able to reap the benefits of increasing competition for their international trading business.