How To Maximize Trades And Lower Costs
June 15, 2009
For all the talk among Wall Street pundits that the economic crisis has caused major cutbacks in technology spending, there is still plenty of evidence to suggest that financial firms are turning to their IT providers for help in achieving nirvana: the best trade price at the fastest speed and the lowest cost possible.
"I've heard a lot of people say there is a hemorrhaging of capital markets technology budgets lately, but budgets aren't down as much as people think they are," said Adam Honore, senior analyst at Aite Group, a Boston-based research firm. "The money is still there and in electronic trading cutting IT budgets leads to a significant disadvantage."
The growing number of alternative trading venues combined with a dispersion of liquidity has led firms to seek sophisticated smart order routing systems, algorithmic trading platforms and complex event processing tools to meet their goals. Fragmentation can provide plenty of trading opportunities.
"If you have technology that can scour several dozen liquidity dark pools, electronic crossing networks, and exchanges-each one charging a different fee--and locate the best price available, you will lower your costs and provide the best execution quality," said Raj Mahajan, president of New York's SunGard Trading, a unit of SunGard Financial.
How smart is smart order routing? A lot smarter than simply finding the best price for a given stock. As the latest incarnation of smart order routing, adaptive technology lets firms combine the benefits of algorithmic trading with the expertise of a human trader. "Firms need to use as much post-trade data as possible in close to as real-time as possible," said Ali Pichvai, CEO of adaptive execution systems provider Quod Financial in New York.
Once embraced strictly by sell-side firms, such technology is also winning favor from fund managers eager to reduce their reliance on broker-dealers which may not always provide them with the most complete or reliable information, he added. Currently, in pilot testing with a handful of fund managers, Quod's Buyside Adaptive Smart Order Router integrates data from exchanges and other dark pools to allow fund managers to make real-time decisions about which broker they should execute through, which algorithm from that broker they should use and which alternative venue they should trade on. Such data, said Pichvai, can also be combined with pre-trade analytic tools to improve the chances of best execution.
While front-end products such as Quod's are becoming increasingly popular, firms are still eager to ensure they can squeeze the most out of their out of their IT provider. That will often mean using a software vendor with multiple products under a single umbrella.
"A software vendor might be able to discount an order management system as an incentive for selling the client smart order routing technology and other services," said Mahajan. "The client would normally have to pay individually for algos, smart-routing, compliance and more so they can reduce their overall execution costs," he adds. The end result: a firm could keep $2 out of every $10 it earns rather than just $1.
The benefits of negotiating for bundled fee structures from vendors offering economies of scale through multiple services can go far beyond immediate hard dollar savings. "In expanding from a U.S. based service to a global platform we needed to consider the costs of training our staff and connectivity to our customers," said Will Geyer, president and chief executive of JonesTrading Institutional Services, an institutional agency brokerage headquartered in Westlake Village, Ca. "When Fidessa improved the functionality of their U.S. model to incorporate global symbology and other required elements such as foreign exchange trading, the vendor became more suited to our business model."
