Ms. Clary: Ian, thats really an interesting point that you are raising. Your clients today are fairly familiar with a number of different algorithmic solutions and they will tell you
I like algorithm A, B, C, D, whatever, and please, if you want me to be your client, make sure you give me access to those market solutions.
Mr. Domowitz: That is correct. The most sophisticated client level definitely demands precisely that.
Ms. Clary: When did that start? Did that exist three years ago? Two years ago?
Mr. Domowitz: Its hard
to tack it down by the month, but I would say that this was sort of a growing issue starting at the beginning of 2006
Algorithms were tested out. They were tried on for size by virtually every major buy-side shop in the United States.
(I)n this test period, were algorithms fulfilling their promise? Were they getting to their benchmarks? Were they actually acting as productivity tools the way they were advertised, and so on and so forth. All that needed to be assessed. As order flow itself as opposed to just connectivity to an algo became the order of the day, then the requests for that type of servicing certainly speeded up.
We purchased Macgregor (Group Inc.) in January of 2006. At that time, Macgregor was already distributing the algorithms of roughly 16 major market vendors. A total of almost 1,000 strategies, at least 200 on distinct strategies.
That was already in place through the order management system at that time.
What has kind of come on board and really followed that Macgregor build out was the demand that it be built into all these execution management systems, whether they were independents, like Portware, or provided by the sell side, such as our own Triton. So that has grown I would say that growth is largely an issue.
Ms. Clary: Yes, Tim.
Mr. Misik: Ive been a beta tester of program trading systems since the mid-90s, and I think the time line for the sell side may be 2006. I agree, having been a consumer of a couple different sell-side execution systems, that
the independent providers, FlexTrade, Portware, you know, whoever they might be obviously theyre agnostic to anybodys algorithms. They really didnt mind the co-opetition and the algo-into-EMS space really was forced upon the sell side within the past two years. I do agree with that. But it existed outside, in the EMSes, well before that.
Ms. Clary: You mean that this was forced on the sell side by the independent vendors?
Mr. Misik: By the buy side. By their clients. For us to consume an execution system, we have to be able to get to as many of those algorithms as we possible can. The ones, like you said, the ones that we want to. We want to be able to have access to X number of suites of algorithms from the various sell-side brokers.
Ms. Clary: The Street is a village where everybody gossips and talks about everybody all the time. Since everybodys got an algorithm
is there a kind of natural selection, you know, where gentlemen go to a pub on Wall Street after dark and have a fun conversation about this algo is incredible
Mr. Zasky: Youve got to try to fish.
I really dont intend this to be some sort of advertisement, but some people view algorithms as a utility thats hard to tell the differences between their performance and what we should use in what circumstance. But there are different approaches that different companies have, even though there are a lot of providers of these types of algorithms, and I think over the next couple years its starting to happen now itll play out which algorithms are being embraced and which ones are not.
At EdgeTrade, one of our core competencies and why Knight acquired us is because of our algorithmic competency. And were already working on the third generation, and were trying to provide a value proposition to the buy side in terms of what these can do in terms of efficiency and anonymity, liquidity aggregation. Whatever the things that a good trader would have done historically on a single stock or portfolio of stocks, algorithms can be beneficial to them for a variety of things current and future things that we cant even contemplate. So there are going to be differences, and there are going to be systems and providers that will differentiate themselves, and all this competition is great.
Mr. Misik: To answer your question directly, as somebody whos consumed an array of all of these algorithms for a number of years, yes, those conversations do happen. I would put a caveat on there, at the risk of making us buy-side traders who do talk about these things sound like nerds, there is not a lot of really unbiased statistics around algorithmic performance. Its hard to compare somebody who trades and cares about VWAP (volume-weighted average price) vs. someone who cares about implementation shortfall vs. somebody who cares about trading into the close. Youre not probably getting an apples-for-apples comparison. But theres definitely discussions of who provides better algorithms, and there is talk of some specific types of strategies and what algorithms do work. That definitely does happen.
Ms. Clary: Tal?
Mr. Cohen: Im sure after a couple of drinks they all look the same to you. But theres actually
Mr. Misik: After no drinks they all look the same to me.
Mr. Cohen: Theres probably a few things I would think the buy side is looking at when considering vendors, in addition to whos better and what allows me to do what I need to do every day.
One, the concept that broker neutrality is a payment mechanism. That often gets lost in this. In other words, I have to select an execution management system that will help me unbundle my trading, (and) therefore, act also as a payment mechanism. So I may actually take some of these algos, not necessarily because I love those algos but (because) its a way for me to pay that particular broker.
Second, if Im on the buy side, Im thinking about when I select somebody whos got an open philosophy. Its not what you have today, but, potentially, what you think youre going to do over the next six to 12 months, as this continues to evolve. So youre looking at your EMS or OMS, and its not an investment today: Youre thinking where will this product be in a year from now, and what is the philosophy of the firm, the vendor behind this particular product? Are they open? Are they committed to integrating different brokers, different strategies that I need, whether its just provincially in the U.S. or globally? So I think those would be two important things as youre selecting a piece of software.
Mr. Misik: I would completely agree, because what is the difference between broker Xs VWAP algorithm and broker Ys VWAP algorithm. On the margin you might be able to see something, it really doesnt matter.
Ms. Clary: Scot. Tim touched on a very interesting point, which was the notion of having a client who was in the process of doing some transition management in the midst of the crisis. So, tell me you have the solution to those kinds of problems.
Mr. Warren: Well, I think, as Tim pointed out, one of his concerns is operational risk and impact on performance. Thats where some of the products that we offer provide a great solution
because its got the liquidity, the ability to move size so youll have minimal market (impact), but it opens up the ability to access multiple markets simultaneously, eliminate currency conversion issues, remove the operational risk and settlement, and transaction costs of being able to do one trade vs. a trade in six different markets simultaneously.
Ms. Clary: For the more traditional institutional client who does invest a lot in broad equity indexes, is there a real economic advantage in trying to increase his position, transition his position, by going through futures products?
Mr. Warren: Theres an advantage it depends, obviously, on the trading strategy. If youre trying to replicate a global equity portfolio, you can certainly do that with futures. You can do it with a total return swap. You can do it with some ETF products.
I think youre going to find compelling cost advantages with the futures vs. many of those other products. You also have the ability of transparency of pricing. And more than anything, its liquidity in that product, in the ability to act quickly and use one trade rather than how many markets you need to trade.
The other thing you can do is, in volatile markets environments, take the beta component out and really deal with the stock-specific risk rather than market risk. Isolating your risk has benefits to the traders.
Ms. Clary: Do you think that the more traditional
institutional clients are realizing that in this kind of market condition, being able to take the beta component out is a real benefit?
Mr. Warren: Well, its back to the first question of what does best execution mean and what tools do you need. Part of it is judgment and flexibility of product type, because if youre forced to go only to one market and one product, you really dont have the latitude to exercise that judgment. So I think were seeing a lot more dialogue with the plan sponsors and their consultants in terms of what products do we have to arm the traders with to be able to carry out our clients objectives? And futures are certainly a valuable component in that tool kit.