Algorithmic trading fails to add up for fund managers

Anuj Gangahar in San Francisco
27 November 2005
Financial News
English
(c) 2005 Financial News Ltd. All rights reserved.

Fund managers have doubts about how algorithmic traders can differentiate themselves as mounting numbers of broker-dealers and vendors enter the fray.Ed Hoyt, a portfolio manager and trader at Calstrs, the Californian State Teachers' Retirement System, speaking at the Financial News Institutional Trading Forum in San Francisco, said: "Everyone typically offers the same suite of products, with direct market access and algorithmic trading.."

Algorithms are used to buy and sell large blocks of stock. Hoyt said algorithmic trading providers who could modify their products quickly were likely to emerge as the winners.

However, he cautioned that fund managers fear being "gamed" by broker-dealers that provide algorithms but also have proprietary trading desks. This is becoming an issue as more fund managers embrace algorithmic trading and more brokers seek to launch or update existing product offerings to meet the demand.

According a recent study by the Tabb Group, the US consultancy, transaction cost research is an integral part of the sellside's strategy to increase its involvement in the buyside's trading process. Essentially, it is the glue binding electronic trading tools such as DMA, algorithms and crossing networks.

Adam Sussman, the consultant at Tabb who wrote the report, said: "Traders complain that the dizzying array of choices available to them can be an impediment to getting the trade done. We believe that using transaction cost analysis can help traders navigate through the choices, pinpointing strategies that have worked in the past."

Firms such as the Bank of New York, Merrill Lynch, JP Morgan and Credit Suisse First Boston have stepped up their efforts in the algorithmic trading arena in an effort to take advantage of this predicted upturn. BNY Brokerage has begun offering a hosted program trading application that provides direct market access as well as a full range of algorithmic trading options.

Merrill Lynch has formed a strategic alliance with Wombat Financial, a specialist software provider. JP Morgan has launched a product which determines and executes the most appropriate algorithms for trading a portfolio of stocks.

Speaking at the forum, Michael Martin, founder of Martin Trading, a Los Angeles asset manager, said: "In the US, where we trade commodities exclusively, we deal with the floor, the computer and the commodity trading adviser desks, so we get an amalgam of information to make sure we don't get steamrollered."

The consolidation of the exchange landscape in the US also provides opportunities for fund managers.

Hoyt said: "It will certainly level the playing field. But if I am playing devil's advocate, I'd say that research is going to gain a little importance at the expense of electronic trading. With the pending deal between the NYSE and Archipelago, you are going to continue to see more algorithmic trading and the buyside playing a more active role."