Electronic & Algo Tading Report

_Algo-Cover-2010-outlines.indd 1_Algo-Cover-2010-outlines.indd 1 9/9/10 6:07 PM9/9/10 6:07 PM

*Source: AutEx 2008. In the U.S., securities underwriting, trading and brokerage activities and M&A advisor activities are provided by UBS Securities LLC, a registered broker-dealer that is a wholly owned subsidiaryof UBS AG, a member of The New York Stock Exchange and other principal exchanges, and a member of SIPC. © UBS 2010. All rights reserved.

UBS is an equities trading partner for your world.

As a top equities trader in the US and around the world,* UBS provides a consistently first-rate experience

whether you’re trading domestically or abroad. And with on-the-ground specialists and advanced tools

customized for over 130 local markets, we can serve you in whatever way you choose—through a single point

person or a team of experts.

We understand the world. Your world.

For more information, please contact us at www.ubs.com/yourworld

“In my world,‘global’ means a broker that’s as comfortable

in Boston as in Beijing and Barcelona.”

UBS ad.indd 1UBS ad.indd 1 9/9/10 2:23 PM9/9/10 2:23 PM

©Institutional Investor News 2010. Reproduction requires publisher’s pri or permission. To receive email alerts or online access to Wall Street Letter, call (800) 715-9195.

www.emii.com

PUBLISHINGALLISON ADAMS Group Publisher

GAURI GOYALBusiness Director (212) 224-3504

ISMAELA BESTSenior Marketing Manager (212) 224-3609

LAURA PAGLIAROMarketing Manager (212) 224-3896

VINCENT YESENOSKYHead of US Fulfillment

DAVID SILVASenior Fulfillment Manager

REPRINTS DEWEY PALMIERIReprints & Premission Manager (212) 224-3675 [email protected]

CORPORATE GARY MUELLER Chairman & CEO

STEVE KURTZ Chief Operating Officer

EDITORIAL STEVE MURRAY

Editor

TOM LAMONT General Editor

VERONICA BELITSKI Executive Editor (212) 224-3297

JEANENE TIMBERLAKE Managing Editor (212) 224-3638

MEREDITH LEPORE Senior Reporter (212) 224-3318

CORRIE DRIEBUSCH Reporter (212) 224-3268

PRODUCTION DANY PEÑA

Director

COVER DESIGN SAMANTHA RALPH

Advertising & Marketing Coordinator

ADVERTISINGADRIENNE BILLS

Associate Publisher (212) 224-3214

PAT BERTUCCI Associate Publisher (212) 224-3890

From the publishers of:

EDITOR’S NOTEThank you for picking up a copy of Institutional Investor News’second annual Electronic & Algo Trading Report. The report,written by the editorial staff of Wall Street Letter, aims to bring youthe latest on this year’s hot topics as well as those key areas that arejust as important but not getting as much play.

Two years removed from Sept. 15, 2008, the financial markets havewithstood much berating from Congress, scrutiny from financial regulators and skepticismfrom the investing public. The world of electronic trading has also been through thewringer, with executives facing questions from the Securities and Exchange Commissionand the Commodity Futures Trading Commission on issues such as high-frequencytrading, predatory algorithms, flash trading, co-location, trade reporting and tracking, darkpools, sponsored access, and more.

This hasn’t slowed the industry at all. Case in point: algorithms are being used now morethan ever, even as regulators question their use by high-frequency traders.

The buyside has always played a key part of the trading process but hasn’t always been thesqueakiest of wheels. Now, however, traders are starting to speak up as regulatory concernspervade more of the buy-side firms’ business. We tapped several head traders to get theirperspectives on what concerns the buyside in a roundtable (page 16) that covers a host ofthese issues.

Of course, we couldn’t address the industry’s concerns without taking a look at the over-the-counter derivatives market, which is facing an automated, electronic world for tradingand clearing that is just over the horizon. Regulators are still sussing out the best way toregulate the industry, but that doesn’t mean the industry’s sitting on its hands. We’ve gotthe details on BNY Mellon Clearing’s plans to approach this market head on and talked atlength about how the firm thinks the clearing structure should be set up.

It was no small feat determining what should be addressed. That being said, we hope youenjoy this year’s report. Feel free to contact any of us with feedback, questions or concerns.

Regards,

Jeanene TimberlakeManaging [email protected]

Customer Service: PO Box 5016, Brentwood, TN 37024-5016Tel: 1-800-715-9195 • Fax: 1-615-377-0525 • UK: 44 20 7779 8704Hong Kong: 852 2842 6910• E-mail: [email protected]

Editorial Offices: 225 Park Avenue South, New York, NY 10003. Tel: 1-212-224-3297 • Email: [email protected]

Institutional Investor Hotline:(212) 224-3570 and (1-800) 437-9997 or [email protected]

A Publication of Institutional Investor, Inc.© Copyright 2010. Institutional Investor, Inc. All rights reserved. New York Publishing offices:225 Park Avenue South, New York, NY 10003 • 212-224-3800 • www.iinews.com

Copyright notice. No part of this publication may be copied, photocopied or duplicated in anyform or by any means without Institutional Investor’s prior written consent. Copying of thispublication is in violation of the Federal Copyright Law (17 USC 101 et seq.). Violators may besubject to criminal penalties as well as liability for substantial monetary damages, includingstatutory damages up to $100,000 per infringement, costs and attorney’s fees.

The information contained herein is accurate to the best of the publisher’s knowledge;however, the publisher can accept no responsibility for the accuracy or completeness of suchinformation or for loss or damage caused by any use thereof.

3

ELECTRONIC & ALGO TRADING REPORT WALL STREET LETTER SEPTEMBER 2010

4 8 12 14 16

NEXT-GEN EQUITY

ALGORITHMS TAKE HOLD

By Meredith LeporeBuy-side firms are looking formore sophisticated tradingtools, and the sellside isstepping up to provide theanswer. Sell-side tradingexecs talk about the future ofalgo trading.

CLEARING THE PATH:PREPARING FOR THE NEW

OTC DERIVATIVES REGIME

By Jeanene TimberlakeBNY Mellon Clearing’sSanjay Kannambadi talksabout how his firm ishandling the uncertainty inthe OTC derivatives market.

MULTI-ASSET CLASS ALGOS

EYE BIGGER STAGE

By Corrie DriebuschMulti-asset class tradingstrategies were expected toflourish into a big business,but the electronic version ofthe strategy is still catchingon. Sell-side executives spokeabout the requests they’refielding in that arena.

THE FUTURE OF ANTI-GAMING : WHERE ARE WE

GOING?By Jeanene TimberlakeAnti-gaming technology hasbecome more sophisticatedas gaming strategies haveadvanced. Dark pooloperators and dark liquidityaggregators discuss currentand future solutions to thegrowing problem.

BUYSIDE WORRIES FOCUSED

ON REGULATION REFORM

By Corrie Driebusch andMeredith LeporeBuy-side executives talkabout the impact ofregulation on theirbusinesses, plus theirtechnology needs and whatthey want most.

TABLE OF CONTENTS

Elec&Algo Report_2010.qxp 9/10/10 9:59 AM


ELECTRONIC & ALGO TRADING REPORTSEPTEMBER 2010 WALL STREET LETTER

4

Next-Gen Equity Algorithms Take HoldBy Meredith Lepore

ADVANCED LOGICAlgos will need to be equipped with the logic and liquidity seekingabilities to perform successfully in different kinds of multi-lateral

trading facilities, which are seen as themain contributors to marketfragmentation. “We are dealing with algostrading in 30 dark pools and up to eightexchanges. As a provider, you have to dealwith a marketplace that has trading venueswith different qualities,” said Hitesh Mittal,head of liquidity management for ITG.

“Each venue behaves differently, so the algo does as well,” saidYoung Kang, global head of algorithmic products at Citigroup. Tomeet that goal, the programs will start to include more granularmarket data, such as a news feed from Dow Jones, said thedirectors.

Collecting more data for algos so they are equipped withstatistical ranking models in their logic is a step that many firmsare working on to help change trading behavior on the fly. An

example of this would be Deutsche Bank’s new algo, Super X,which uses a statistical ranking model that analyzes the executioncharacteristics of each venue. In searching for the best place totrade an order, it takes the traders’ constraints and stockinformation leakage into account. Kang said Citi’s algos areprepared to handle difficult volatility and can halt a trade if thereis market movement outside of theexpected range. Algos must also be able tolearn from past experience by factoringtransaction cost analysis into their strategy.

Minimizing the time between detectionof events, ranging from news events,market data or a quote request, and theactual placement of an order is essential.“Algos are now fully dynamic systems, using complexmathematical models to drive both macro level decisions ofspeed and urgency but also the micro level order placement. Thesophistication of these models will continue to adapt and evolvebased on client demand and market structure change,” said

As the buyside becomes more advanced in its use of sophisticated

trading tools, the sellside is speedily developing algos that are equipped

with superior logic and liquidity seeking abilities, statistical ranking

models and the ability to trade in international markets with limited

market impact. Market participants on both sides stress that coming

algos have to be prepared to execute successfully in more volatile

markets, adhere to real-time transparency and reporting demands and

work in countries with very diverse market infrastructures. According to

an analyst, spending on advanced algorithmic trading technology will

reach more than $1.3 billion in the next year.

Hitesh Mittal

Young Kang


HIGH FREQENCYTRADING AND FX

By Daniel Torrey, head of New Business-Americas, ICAP Electronic Broking

Foreign exchange (FX) is theworld’s most liquid market andpresents significant opportunitiesfor traders searching for alpha innew asset classes.

OTC FX functions well as a self-regulated market, as illustrated by theEUR/USD price action that occurredon the electronic EBS platform onMay 6, 2010, the day of the US

equities market ‘flash crash’. In highlyvolatile conditions, trading volume onEBS exceeded $383 billion (singlecount), representing nearly 255,000transactions. EBS provided orderlyefficient, effective access to prices atall price points, even during the mostvolatile 10 minutes of the trading day(see chart).

EBS was the first interbankplatform to permit access to the buy-

side by enabling hedge funds andCommodity Trading Advisors (CTAs) totrade in the spot FX market throughthe pre-screened credit of an EBSprime bank.

Before entering the FX market,high-frequency trading firms need tounderstand the different FX tradingvenues available (e.g. independentversus bank-owned), and mustaddress a number of technology and

integration issues. They will also need to

modify their exchange-based equities tradingstrategies and algorithmsbefore they are ready forFX. A robust softwaredevelopment and testingenvironment, and arigorous simulated tradingenvironment are alsocritical.

Access to high quality,granular market data isessential, and FX-specificrisk managementsystems must beintroduced.

However, despite thechallenges that entry tohigh frequency FX tradingpresents, rigorouspreparation and planningwill result in fewerfrustrations on going live.

EUR/USD price action on EBS - 6 May 2010

1.27101.27001.26901.26801.26701.26601.26501.26401.26301.26201.26101.26001.25901.25801.25701.25601.25501.25401.25301.25201.25101.25001.24901.2480

5/6/2010 EUR/USDBidOfferInterruptDeal

SPONSORED ARTICLE

18:05:00 18:10:00 18:15:00 18:20:00 18:25:00 18:30:00 18:35:00 18:40:00 18:45:00 18:50:00 18:55:00 19:00:00

Daniel Torrey heads EBS New Business-Americas for ICAP Electronic Broking (IEB). Dan and his team’s primary focus is selling thebenefits of EBS and EBS Prime to hedge funds, CTAs, FCMs and proprietary trading firms who seek access to EBS’ unparalleledwholesale market liquidity. email: [email protected]

The day of the US equities ‘flash crash’ (May 6, 2010) traders using the EBS platform traded recordamounts of volume ($383 billion). Market participants executed trades [red diamonds] at all price pointsamidst significant price swings, with virtually no gapping, even in the most active minutes of trading.

ICAP ad 9/9/10 2:34 PM Page 1


Owain Self, global head of algorithmictrading at UBS.

TRANSPARENCYNext-generation algos will also need toprovide more transparency in thesevolatile and highly regulated times.Calculating risk exposure will be on the to-

do list for the next generation and real-time algos can providevisibility into an algo’s potential exposure and determine a trade’srisk impact. Risk assessment will be especially critical with cross-asset trades that have multiple legs in a single order and are donein real-time. If the trade is being exposed too much, the algo canbe adjusted before the order is executed. “Clients need to seeslippage of orders in real time and where the orders are beingexecuted,” said Kang. Citi is planning a roll out of its new service,Citi Trade Viewer, which will help clients achieve these goals. Thedesktop trading application, to be launched this fall, enablestraders to see every detail of an order in real time using visualanalysis.

ITG has increased their consultations with clients in the last fewyears so clients really understand how the algo functions andwhat is the best way to use it, Mittal said. Transparency will alsohelp with regulation: data used in trading can be collected, stored

and reviewed for compliance purposes.

ALGOS IN INTERNATIONAL MARKETSAlgos that can be deployed in international markets, especiallyemerging markets, are the next frontier. The sellside is working onbuilding algos that are as similar as can be to the algos the tradershave become used to but that also account for internationalmarket nuances and risks. Traders are more willing to invest inforeign markets if they are able to use the same methods they arecurrently using for their portfolios, said Dan Pagano, v.p. ofstrategic alliances at Linedata.

ITG recently made its algo suite available in Israel, and both Citiand ITG will be launching algos in Brazil for the first time soon. UBS,Bank of America Merrill Lynch, Jefferies, Nomura and DeutscheBank have also started extending their algo suites for emergingmarkets such as Japan, China, India, Greece, Australia, Canada,Eastern Europe and Latin America. “It’s important to note that weare operating in an environment of rapid market structure change.This is a global phenomenon, as regulators across the Americas,Europe and Asia-Pacific are grappling with ways to evolve their rulesand surveillance apace with the global markets and advancedtechnology,” said Self. This requires the architecture of analgorithmic trading platform to be respectful of core regulatoryconcerns, while always staying focused on serving investor clients.

Owain Self


Liquidity found. Discover a new category of algorithms designed specifically to sourcesmall- and mid-cap liquidity.

Oasis is a unique and focused smart order execution strategy that handles obstacles related tothin and difficult to trade names.

Combined with Knight’s leading market share in stocks that trade less than two million sharesper day — now you’re executing at the Oasis.

Find out what Knight can do for you

© September 2010 Knight Capital Group, Inc. All rights reserved. Knight Equity Markets LP and Knight Capital Markets LLC are off-exchange liquidity providers. Oasis is offered through Knight Direct LLC. TradeWeb BlockData - Market Rankings are based on trade volume reported by Broker Dealers (Knight Equity Markets, Knight Capital Markets and Knight Direct LLC). YTD through Mar 31, 2010. To learn more about Knight Capital Group, Inc. (NYSE Euronext: KCG) go to www.knight.com

To find out:phone +44 (0) 20.7997.7818 | US +1.212.479.2335email [email protected]

Execute at the

Oasis

KnightCap.indd 1KnightCap.indd 1 9/9/10 10:33 AM9/9/10 10:33 AM



8

BNY Mellon’s Sanjay Kannambadi

ClearingThe Path: Preparing For A New OTC Derivatives Regime

WSL: What concerns are you hearing from clientsrelated to OTC clearing?

KANNAMBADI: We’ve been talking to key clients over the last fewmonths, and from a [futures commission merchant’s]perspective, many of the conversations we are having are basedon getting our perspective and clarification around what ishappening with respect to the Dodd-Frank Act and the potentialrules to be written.

There is lots of information in the marketplace; some isconjecture, only part of it is fact based. So, there is a level ofclarification that all of us are seeking and those are the

conversations we are having with clients. We are participating atindustry forums like the ones held by the CFTC to hear andunderstand the latest thinking and direction and share our inputand opinions.

WSL: The CFTC noted that as part of thatdiscussion it wanted to solve conflicts inherent inmandating clearing of OTC derivatives. Whatconflicts do you see?

KANNAMBADI: We certainly support transparency and openness inthe marketplace on behalf of our clients. To the extent they makememberships in the clearinghouses restrictive, that will restrict themarketplace and limit openness and fairness. That is somethingwe are certain about and we have heard from our clients that theywant us to clear their books of business.

As it stands today, some of the clearinghouses have very highartificial bars [for membership] for a variety of their own reasons,which do not qualify BNY Mellon Clearing to be a direct clearingmember, so they expect us to go through other clearing members,and that doesn’t make any sense. We are the largest asset servicerin the world with $22 trillion in assets under custody andadministration for plan sponsors and asset managers, and if weare going to represent them, we need to be members of thoseclearinghouses.

One problem we have heard discussed about an open constructis that management of risk is paramount and entities that do nothave the size and capacity like the large dealers to manage riskmay create issues. But at the end of the day, one of the key pointsis that as long as margins are set and [collateral is] collectedappropriately, that is the first level of defense. The clearingmembers are not the only defense mechanism there. The clearingmembers do come into play, but that is not the first level ofdefense; it’s the margin you are collecting. In a default or worst-case scenario, there is no reason why you cannot allocate orauction a portfolio to clearing members or other parties in themarketplace, such as the buyside, for example. When you talk

A major driver of the recently

passed regulatory reform was

the recognition among market

participants and regulators that

a stricter regulatory framework

is necessary to govern the over-

the-counter derivatives market.

The Securities and ExchangeCommission and the

Commodity Futures TradingCommission are both working

on rules that will detail the structure. The industry,

meanwhile, is working with what is available and preparing

their businesses for the framework to come. Among those

firms is The Bank Of New York Mellon, which launched a

futures commission merchant just this summer in order to

play a role in the whole process. Managing Editor JeaneneTimberlake spoke with Sanjay Kannambadi, ceo of the

new venture, BNY Mellon Clearing, about what exactly

that role will be, what the concerns are from a regulatory

perspective, and where the complexities lay.

Sanjay Kannambadi

QQ&&AA::


©Institutional Investor News 2010. Reproduction requires publisher’s pri or permission. To receive email alerts or online access to Wall Street Letter, call (800) 715-9195. 9


about allocating and auctioning [a portfolio], the more partiesthere are, the better. Further, suggesting that the same partiesinvolved in risk management of these instruments during themarket crisis should provide expertise in the new construct is aconflict by itself.

Clearinghouse structures have been in place for a long time inthe futures markets. You can always argue futures are different,but at the end of the day, the [Dodd-Frank Act] is trying tonormalize those factors to make those products more standardizedso they can be cleared. That is the spirit of the bill— transparencyand central clearing—so there is some level of structure in themarketplace for regulators and all the relevant parties.

WSL: You just launched the FCM business, BNYMellon Clearing, so what is the bank’s vision in termsof how the unit will fulfill the needs of your clientsin the cleared and non-cleared business as some ofthis activity starts to shake out?

KANNAMBADI: BNY Mellon Clearing represents a logical extensionof our business model. We intend to meet the growing needs ofclients who trade futures and derivatives and are seeking a globalclearing partner with proven operational, financial and riskmanagement expertise. Regarding the shakeout, central clearingand where the FCM fits seems to be clear, but [on the OTC side,]everything is dependent on how the rules are written.

Typically, in a central clearing environment, mostclearinghouses will require clearing members to provide clearingservices. In the majority of cases, if you are clearing client businessyou need to be an FCM. We will play that role. In addition, ourclients are recognizing that in a cleared environment the bulk ofthe operations and risk is shifting from the dealer to the FCM.According to the bill, clients get to decide which clearinghouse touse for clearing. Once the trade is executed and is accepted forclearing, the clearinghouse becomes the client’s counterparty withthe FCM as the key intermediary. So clients will need to establishthose FCM relationships upfront. This is an important role that weas an FCM will play.

On the uncleared side of the equation, there are somequestions outstanding. For example, swaps are also included in[the bill]. One question that remains is if you are a swaps dealerand you’re dealing in non-cleared swaps, how is the marginprocess going to work and who decides that? I think it’s theregulators, between CFTC and the [Federal Reserve Bank] that willmake the decision on the margin percentage, but then who gets tohold the margin? [Swaps dealers] have to give the option to clientsto segregate it or not. If a client decides they want their margin tobe segregated, then the swap dealer needs to segregate it but the

only entity that can hold margin is an FCM. How that will all workout, we don’t know. Because the FCM already takes in margintoday, we already have the infrastructure to take in margin andsegregate it. So, depending on how rules are on the non-clearedside, we will perhaps have to play a role there.

WSL: In the midst of all the discussion about therules, is anyone working on the nuts and bolts ofhow this system will function? And is this an issueat all?

KANNAMBADI: Yes, we are working on the flows with theclearinghouses. We have been working with [the InternationalDerivatives Clearing Group] on that, for example. Presumablythere are going to be variations of flows amongst the differentclearinghouses. Whether it will all be centralized through onesingle workflow or not is not known at this point, but down theroad, I would expect it to be standardized.

There are going to be complexities either way. It’s a work inprogress and over a period of time the process will improve itself.The important thing I think people need to understand andrecognize is that there is precedence for some of this, it’s not likewe’re starting from scratch. From our perspective it’s very clear: weneed to make sure this process is simple for our clients.

WSL: Both the CFTC and the SEC are just starting tolook at new rules, so what are you doing now totread water, so to speak?

KANNAMBADI: We are talking to all the key constituents in themarketplace and trying to better understand their individualprocesses as it relates to the clearinghouses. We are doing that inthe U.S. and globally as the global model also develops. We arestaying in touch with all the key market players and organizationsso we are up to speed on the latest developments ourselves andwe’re working with clients to give them our perspective on how wethink the bill and rules will play out.

We are getting ready for central clearing. We are IDCG clearingmembers, and we’re going through the test phase and will beclearing trades for clients by the end of September. So we aregoing through the connectivity test and things like that.

We are also looking at other clearinghouses and mechanismsbeing discussed in the marketplace, such as the [CME Group’s]interest rate swap marketplace. We are also talking to[LCH.Clearnet] and all the other players. At the end of the day, weas an FCM will look to clear books of business wherever our clientswant to clear. In the whole scheme of things the FCM is a neutralparty, it’s all client-driven.


FROM ACTIONABLETCA TO CUSTOMSTRATEGY DESIGN

Carla Gomes, Ph.D., research analyst, Pipeline Financial Group, Inc. and Henri Waelbroeck, Ph.D., director of research, Pipeline Financial Group, Inc.

The pervasiveness of high frequencytrading and increased awareness ofthe costs of trading large institutionalorders have raised the stakes fortraders, who now face an ever morefast-paced environment with a widerset of trading tools and venues tochoose from. Traders need to knowwhether they are being takenadvantage of and which algorithms arethe most effective. Without reliableTCA, how are they to know?

TCA is meaningful only in relation tothe context of a trade

The relevance of TCA to strategictrading decisions has grown with thepressure on trading desks to reducecosts. In general, TCA is employed to

evaluate brokers, algorithms andexecution venues in order to select themost efficient. It usually consists ofimplementation shortfall comparisonsbetween competitors, sometimesaccounting for trading difficultymeasured as a function of order size,liquidity and volatility. It is widelyacknowledged that trading alpha,market conditions, speed selection andlimit prices also have a considerableimpact on the outcome of a trade. Yet,these are seldom considered instandard TCA. This limitation is farfrom trivial when a trading desk needsto determine the providers that deliverthe best execution, yet each onereceives a systematically differentorder flow. Inferences on the quality ofexecution, even from a single broker,

prove to be very difficult when thecircumstances of the trade are notknown. Pipeline’s most recentdevelopments intend to fill this gapand convert TCA into a new tool thatcan be applied not only to post-tradeback-testing, but also to live tradingand custom strategy design.

A new actionable TCA framework candistinguish algo performance from theuse of limits or trading schedules

Trading schedules and limit prices, ifused appropriately, can enhance alpha,but if used incorrectly, can exacerbatetrading costs. In standard TCA,implementation shortfall costs aremeasured as totals. Hence, theseparate impact on overallperformance of the algorithm, thetrading schedules and the selectedlimit prices cannot be identified.Pipeline’s enhanced TCA determinesthe significance of every componentof shortfall costs. It provides anassessment of the trade-offsassociated with each decision elementand it determines the mostappropriate selections. For speedselection, market impact is weighedagainst alpha capture to decidewhether an execution with urgency is

SPONSORED ARTICLE

Most trading desks have tried to introduce Transaction Cost

Analysis (TCA) into their process, but for over a decade they have

found it frustrating and ineffective. In general, trades are broken

up into multiple placements and sent to a variety of brokers

under different market conditions and with different limit prices.

Inevitably, the end shortfall performance results are biased and

any inference made from them is compromised.

ALGO-PipelineArticle 9/9/10 2:37 PM Page 1

worthwhile. For limit price selection,to check whether there areopportunities for tactical priceselection, execution price savings areweighted against opportunity costsfrom incompletion due to the pricelimit. Also, algorithm performance canbe evaluated in parallel in terms ofadverse selection and opportunisticsavings. With this knowledge, traderscan devise forward-looking solutionsand be more effective making theright decision at the time of the trade.

Portfolio managers have distinctorder creation strategies leading todifferent short-term alpha patterns

Just as an institution can implementseveral strategies from a wide rangeof well-known styles of fundmanagement, including growth, value,market neutral, indexed, etc., a singleportfolio manager may also use amultitude of strategies with his owndistinctive investment style and skill.Typically, orders originating from long-term strategies may createopportunities for tactical trading,whereas orders more focused onshort-term returns usually requiremore aggressive trading, early on or atlater stages of the trade. As a result,the order flow sent to the trader isvery diverse in terms of short-termalpha loss profiles and that mayrequire very different executionstrategies. Although some orders aresent with very specific instructionsand goals, there are still many caseswhere the trader has considerablediscretion. A quantitative post-tradeanalysis such as Pipeline’s can helpthe trader do a better job by providingdetailed information on the short-termalpha loss profiles that characterizeeach portfolio manager’s investmentstyle. Each alpha profile is associatedwith specific trade arrival settings oforder creation time, order size, marketcapitalization etc., which comprise theset of relevant predictors.

Pipeline’s Alpha Pro suite, a newgeneration of customized tradestrategies, leverages this TCAframework to associate an optimalstrategy to each trade arrival

Equipped with the detailed knowledgeof the alpha loss profiles at the timeof the trade, Pipeline can facilitateefficient trading by recommending ordeploying best-fitting executionstrategies that enhance alpha capture.Orders with weak alpha loss areexecuted with tactical limits, whichare more effective if deployedautomatically rather than manually.Orders with considerable alpha lossare executed with front-loadedstrategies with reduced timing costs.With customization of tradingstrategies, the opportunities fordelivering the best execution do notend here. A close collaborationbetween portfolio manager, trader andbroker can further leverage thiscomprehensive body of knowledge bydetermining the specific benchmarks,the goals to be met and then refiningthe design of execution strategiesaccordingly.

Pipeline’s post-trade analysis enablesdynamic strategy performanceevaluation and fine-tuning

Pipeline’s comprehensive TCA is notlimited to the validation of tradingstrategies; it also provides all thenecessary information to identifyopportunities for fine-tuning eachstrategy. Gradually, some drivers maylose importance whereas others maybecome more relevant and, as aresult, trade profiles may also change.Short-term alpha loss is one of thecomponents of implementationshortfall that is estimated to validatetrade classification and determinewhether characteristics of the orderflow have changed or remained thesame. Execution performance isevaluated not only in terms of market

impact and post-trade reversion, butalso in terms of adverse selection vs.opportunistic savings. The latter isidentified by the analysis ofparticipation rates under differentmarket conditions and trackingperformance against the ParticipationWeighted Price (PWP). Additionally,the performance results provideguidance to the best approaches interms of speed and limit pricemanagement in accordance with thespecific objectives of each manager.These enhancements to standard TCAtransform it from a post-tradereporting product into an actionabletrading tool that provides direction tocustom strategy design.

Summary

• An evidence-based selection of bestexecution algorithms requiresdependable TCA that accounts forthe trading environment. Pipelineattends to this need with anenhanced TCA that identifiesseparately all sources of trading costand lays the groundwork for optimaltrading strategy design.

• Assessing potential alpha loss is atthe core of the daily trading decisionprocess, but quite challenging whenthe sources of order flow are verydiverse and not fully understood.Post-trade quantitative analysis canprovide validation to the selection oflimit prices and trading scheduleswith immediate insight into the alphacharacteristics of the order flow.

• Pipeline’s Alpha Pro uses thisknowledge to direct eachdistinguishable trade profile into itsbest-fitting scheduled tradingstrategy. Alpha Pro strategy designis dynamic as it capitalizes onrecurring, forward-looking TCA.

SPONSORED ARTICLE

ALGO-PipelineArticle 9/9/10 2:37 PM Page 2



12

Multi-Asset Algos Eye Bigger StageBy Corrie Driebusch

Currently the most popular multi-asset class algorithms remainoptions- and equity-tied algorithms. “Options and equities are anatural marriage,” one hedge fund manager said. GoldmanSachs, Barclays, Jefferies, ITG and Knight Capital Group all offerpairs trading strategies that tie options and equities. For instance,Knight’s two offerings are a delta-neutral, or delta-adjusted,strategy and a volatility offering. The former allows a client,typically a convertible arbitrage hedge fund, to execute an optionat a particular delta while simultaneously executing a delta hedgein the underlying equity. Volatility algorithms allow traders topurchase an option at a particular volatility regardless of pricewhile purchasing the underlying security at the same time.

Joe Wald, managing director at Knight, noted that thesetime-saving tools have proven incredibly important in an

especially fragmented market. “You’retrying to maximize alpha that is heavilydependent on executing both legs of thestrategy—if you’re wasting time orinefficient on getting the hedge on,you’re really giving up alpha there,” heexplained. One New York-based hedgefund manager who trades both equities

and options agreed, saying the only multiple-asset classalgorithm he uses is a delta-hedge strategy. “It ’s not very sexy,but it ’s widely used,” he noted, adding that he is not looking forother algorithms at this time.

Harrell Smith, head of product strategy at Portware, said theslow pick-up in multi-asset algos beyond options has been an issueof lagging demand. Nevertheless, fundsthat trade globally are driving demand foralgorithms that can handle foreignexchange. Smith noted that in addition tooptions, FX algos are also viewed largelyas “useable” for algorithmic trading.Portware already has a suite. HiteshMittal, head of liquidity management atInvestment Technology Group, said ITG has focused a lot of itsenergies on its algorithm that incorporates equities and foreignexchange for stocks listed on both the Toronto Stock Exchangeand either Nasdaq Stock Market, NYSE Amex or the New YorkStock Exchange. ITG is looking at whether to launch similaralgorithms between other marketplaces, such as Europe.

Mittal also sees futures, a natural hedge for equities, asanother potential asset class to be embraced by algorithms. “Itmakes perfect sense to me to do [a futures and equities trade] intandem versus one guy yelling over to another guy across theroom,” Mittal explained. “It’s an obvious one the market shouldmove very quickly to.” In May ITG rolled out equity index futurestrading capabilities in its portfolio algorithm DynamicImplementation Shortfall. Mittal said it wasn’t based on clientdemand, rather a belief that this is the next step for the industry.“We see this growing in the future,” he said.

The marriage between options and equities has flourished in the

multi-asset class algorithm arena, and now the industry is looking

forward to offerings that are next in line. Both buy-side trading

firms and sell-side algorithm providers expect some growth in

multi-class algorithms, specifically in foreign exchange and futures

in the next year or two.

HarrellSmith

Joe Wald


Wall Street Letter is the only paid news service that brings you up-to-the-minute coverage of what’s

happening in institutional trading, advances in electronic trading—including algo’s and dark pools—

high-frequency trading, exchanges and alternative platforms.

Whether you trade, or provide trade-related services at an investment manager, hedge fund, proprietary

Wall Street Letter provides the critical market intelligence on what

the latest developments in trading and operations mean to you—and why. Other publications may report

on new technology and processes; only Wall Street Letter consistently delivers the perspective from the

are responding to daily changes in how, where, and why they route, track, and clear their trades.

1-800-715-9195 for immediate access.

trading strategy, regulatory issues and market structure issues

you don’t miss key headlines

24/7 live news updates via the website – News is posted as it happens

Fully searchable PDF archive of past issues going back to 2001

www.wallstreetletter.com

WSL booster color.indd 1WSL booster color.indd 1 9/9/10 6:17 PM9/9/10 6:17 PM



14

The Future Of Anti-Gaming: Where Are We Going?By Jeanene Timberlake

The concept of anti-gaming technology and the logic that is usedto build it is getting more attention these days in light of anincreasingly microscopic focus on trading and market structure.“Anti-gaming” is the keyword in nearly any conversation thatdiscusses dark liquidity, high-frequency trading or buy-side algos.Several firms have been quietly perfecting the technology, whichessentially intends to protect a buy-side order from being pickedoff at a higher price than market realized prices in order to makemoney on a sale at the NBBO.

The technology ranges in approach and application, but allworks toward the goal of limiting buyside interaction withpredatory sell-side flow. Firms are using post-trade methodologies,reviewing data on a delayed schedule, but also have added in real-time techniques. Some variations being developed will featuremonitoring activity at the point of sale and the ability to monitorfor gaming across the market as opposed to looking at activitytaking place in a single shop.

Already, there are concerns that regulators may try to restrictgaming activity, though it’s unclear how rules would work. Onefactor that would make regulation difficult is that gaming isn’tillegal or unethical, it’s a natural part of trading that traders haveto master to a certain extent. “True gaming happens when firms

are identifying supply and demandimbalances in the marketplace and thentake market action to effect price based ontheir assessment, but identifyingsupply/demand imbalances and using thatto one’s advantage is the job of everytrader,” according to Doug Rivelli, ceo ofPragma Securities.

NOT YOUR GRANDMA’S GAME Anti-gaming technology started gaining traction and credibility asmore trading moved electronic. Larger institutional orders are thetypical targets, and the games are not new, according to HenriWaelbroeck, v.p. and director of research at Pipeline Trading

Systems. “In the early days, people talked of penny jumping andfront-running.” In the first instance, a specialist, knowing of a largeinstitutional limit order to buy, would buy the same stock for aprice one penny above the institution’s bid, hoping to move theprice up and create an opportunity to make money back on thesale. In the latter, illegal instance, a broker receives a buy orderand before filling the order, places a buy order for the same stockin a proprietary account; the broker thenplaces the customer order, hoping to pushthe price up to later sell the stock that waspurchased.

Gaming today is more sophisticated inlight of the increased use of algorithms andthe prevalence of dark pool trading.According to Mario Giannone, head of market surveillance and asoftware developer at Liquidnet, “peeking” is a problem commonin pools where trades are negotiated between counterparties. Inthat situation a buy-side and sell-side member match up, and afterthe buy-side member indicates he is ready to trade, the sell-sidecounterparty is no longer there. “They can see a match and theyknow there is someone of size on the other side,” he said, addingthat while once may be accidental, multiple “peeks” often are not.Gamers may also try to test a price by buying little bits of aparticular stock at a time to test an institutions limit price anddetermine the size. Eran Fishler, director of research at Pragma,said one clue is when an institution gets a fill in a dark pool at aprice which is higher than the prices realized in the market priorto the fill and after the sale, the price immediately reverts back tomore favorable levels. The danger in both cases is that the sell-sidemember may go out to the public market and move the pricebefore going back to the pool to complete the trade, if the buy-side interest is still there.

PLAYING DEFENSESince no one expects gamers to go away, the consensus for now seemsto be that the only option is to block the gamers once detected. Firms

Doug Rivelli

Mario Giannone




are doing this now by combining technology for intraday detectionwith old-fashioned data mining with the goal of finding tradingpatterns, whether within specific dark pools or for specific clients.Fishler said Pragma studies post-execution data for executions itsclients make in the 40 or more venues it provides access to on a daily,weekly and monthly basis. “We want to study [the executions] and seewhich destinations play host to gamers. So, we look at the return pre-and post-fill at the destination,” he said, which is where the firm willnotice whether the price reverts consistently.

Pragma monitors a variety of other factors as well to root outanomalies. Dark pools with anomalies are blacklisted until Pragmacan determine whether the anomalies are due to valid marketactivity or gaming. The answer to that question determinesPragma’s next step, which can be as severe as deciding not toconnect to a certain venue any more, although Fishler said insome cases they can target gaming down to the counterparty level.

Giannone said his firm also monitors historical data that isgathered from 35 different programs that survey his firm’ssystems. “We gather information and look for patterns among ourmembers,” he said, noting it takes place on a T+1 basis to monitorfor outliers that may occur among members. “If any members aredoing something much more frequently than the rest of thecommunity [compared to a community benchmark]... we willproactively investigate that,” he added.

In both cases, these historical views are backed up by real-timesystems. Giannone noted members of his pool are encouraged tocomplain if they see any type of suspicious activity but the pool alsodoes its own monitoring. “We’re hoping to catch it before a membercomplains, of course,” he said. “If we think it’s a bad tradingprotocol, we may even, intraday, block a member from matchingagain. One reason would be to alleviate frustration, but another isto give time to investigate what happened,” he added, noting thatenough evidence will earn a permanent suspension for the gamer.

Pragma’s real-time monitoring and anti-gaming help determinewhat activity is happening as part of gaming and what might be areal strategy. If it is determined that the activity can be attributed toa gamer, the firm will stop trading or put limit prices on the trade, amove Fishler characterized as the “main tool” for prevention.

FROM DEFENSE TO PREVENTIONProviders don’t have the same concepts in mind when looking at

the future, but there is agreement that one ofthe best tools for the future is to use gamers’own techniques to combat them. “Anti-gaming technology has developed asdefensive mechanisms,” said Pipeline’sWaelbroeck. “The defensive approach makesthe assumption that someone else knows

better [than the institution placing the trade]... What I would like tothink is that presumption is fundamentally wrong. No tradershould resign himself or herself to the idea that others are betterinformed than they are,” he added. That line of thinking is whatstarted Pipeline on the development path of its AlgorithmicSwitching Engine, launched in 2007. It applies the analytical powerhigh frequency traders use to help determine what will happen ina stock to predict a particular algorithm’s performance andcombines that with the institutional trader’s own knowledge of thestrategy being deployed. On top of that, Pipeline recentlyintroduced Alpha Pro, which combines a firm’s trading history withreal-time conditions to create a custom strategy for traders.

Pragma’s approach will also look to use gamers’ strategy oftrying to identify orders. The firm is developing an algorithm thatwill attempt to detect gaming that is happening relative to thetrader using the algo as well as gaming that may be happeningelsewhere in the market and plan trade executions around that.“Whether I’m trading or not, the next generation will understandwhat I am doing and what the market is doing,” said Fishler.Figuring out where gaming is happening outside your own world isalways difficult because you never really know what is happening,Rivelli added. This algorithm should go a long way to solving thatissue, though he cautioned that these types of strategies should stillbe used in concert with other detection techniques.

Liquidnet’s Giannone said his firm is in the process of rollingout an enhancement to real-time capabilities that will movedetection to the front-end. He noted that right now, real-timemonitoring will alert the pool operator that suspicious activity hasoccurred, tipping off staff to monitor particular activity andflagging the trades for further investigation and possibledisciplinary action. The new capabilities, being developed in-house, will monitor for gaming scenarios that, if engaged, will beacted on automatically. “If someone is breaking protocol, thesystem automatically takes action without investigation,” he said.Members engaging in the negative activity would receive alertsand the third alert would result in an instant block from trading.“We would still investigate, but in terms of being proactive, this isthe Holy Grail.”

There is some concern that regulation could be underconsideration to limit gaming in the U.S. similar to that whichexists in the U.K. requiring pools to provide prevention technology.Operators of global pools would likely be more prepared in thatcase. Still, the prospect is considered unlikely in the U.S. in light ofthe fact that gaming is still within the rules. “There’s an importantdifferentiation between gaming based on an assessment ofsupply/demand versus actually knowing [information] and front-running it. As long as a trader is taking market risk, it’s difficult toregulate a trading strategy,” Rivelli said.Henri Waelbroeck




16

Buyside Worries Focused OnRegulation Reform

FROM THE BUYSIDE

BASIL WILLIAMS, ceo of Concordia Advisors. Williams oversees

the daily investment and business operations of the firm. Prior to

being named ceo, he was president and head of fixed-income

trading. Williams began his career at Merrill Lynch.

JONATHAN KANTERMAN, managing director at Stillwater

Capital Partners. Kanterman has more than 16 years of investment

management experience and has worked at firms such as

Valenzuela Capital Partners and Woodford Gayed Management.

JUDITH MOSES, portfolio manager at Evercore Wealth

Management. Moses has more than 19 years of experience in the

investment management industry. Prior to joining Evercore, she was

v.p. at U.S. Trust, Bank of America Wealth Management and

before that she was with the Charter Financial Group.

KEVIN CRONIN, director of global equity trading at Invesco.

Cronin has spent more than a decade at the helm of global trading for

investment firms. He has testified on multiple occasions in front of

the Securities and Exchange Commission on a variety of subjects.

STEVE SACHS, director of trading at Diamond Hill Investments.

He previously held the same position at SGI/Rydex.

is now playing catch-up to this new, quickly changing environment.Right now, I don’t think there is one major concern, but manysmaller issues that the industry is focused on. [For example], the[National Market System] issue. The Securities and ExchangeCommission is proposing a new Rule 613 that would requirenational securities exchanges and national securities associations(self-regulatory organizations) to act jointly in developing a NMSplan to develop, implement, and maintain a consolidated ordertracking system, or consolidated audit trail, with respect to thetrading of NMS securities.

[There is also] the “large trader rule,” which would require high-frequency and other large-volume traders to code their trade ticketswith a unique identifier.

For the circuit-breaker issues, we need to help stop flash crashesand [find] ways to speed recovery if they do occur, bust erroneoustrades when crashes happen, etc.

Algorithm flow catching up to phone orders is another issue. Thefact that the volume of shares that buy-side traders send to sales desksand to the equities markets using algorithms will soon be the same.

Probably the biggest issues are the unknown results of The Dodd-Frank (Wall Street Reform and Consumer Protection) Act, whichgrants the SEC an entire array of new powers. The unknown usuallyresults in the most apprehension.

CRONIN: It’s not easily contained to one issue—it’s really the wholepicture. After the flash crash, you have a number of people trying torush to judgment on what went wrong and who’s responsible. As Ilook at the world I can’t help but think the biggest risk for all of us isto overregulate an environment that’s not today very well-known.For example, look at high-frequency trading. A lot of us haveconcerns about high-frequency trading. But there are a number ofdifferent participants in the marketplace that would be consideredhigh-frequency traders and their place in the market is very good. It

Regulatory issues have been a growing concern for industry participants of late, including those on the buyside, thanks to the

sheer volume of new regulatory activity expected in the next few years. Chief among those concerns are the far-reaching

implications of the recently passed Dodd-Frank Act, which touches nearly every aspect of the financial markets and permeates

nearly every asset class. The following participants spoke about those concerns and how they’re dealing with it now, as well as

their technology issues, how they’re handling volatility and what they want now in response to questions from reporters

Meredith Lepore and Corrie Driebusch.

WSL: What is the biggest regulatory concern facing the industry?

KANTERMAN: I think this is one of the most historic times for theindustry, with new levels of technology driving growth, efficiencyand productivity, coupled with the resulting need for properregulation. As is traditionally the case, regulatory oversight lags and




needs to be well-understood and not a rush to judgment toappease some faction of the market that says something has to bedone. Many of the things that led us to May 6 are not as easily fixedby putting circuit breakers or disallowing market orders.

MOSES: While the recently passed Frank-Dodd Bill will certainly havea far reaching and, at this point, indeterminable impact on thefinancial services industry, of immediate concern to those of us inwealth management is the uncertain tax regime. It is a challenge to

make investment decisions when one doesn’tknow what the capital gains or dividend taxrates will be next year. Will Congress allowPresident George W. Bush’s tax cuts to expire,in which case our clients will be looking at apossible dividend tax rate of 39.6%? I haveheard numerous possibilities being discussed,including dividend and capital gains rates of

20%, 25% or 28%, an extension of the Bush tax cuts for one year,keeping the tax cuts for those earning less than $250K, etc. There isthe same uncertainty with regard to estate taxes.

WILLIAMS: For certain operators in the hedge fund arena, SECregistration is a burden. A less certain question is bank capitalrequirements and the lending activity of alternative asset managers.What will requirements mean to banks and bank clients?

SACHS: I think we’re at a point where the pendulum has swung waytoo far and we need a complete overhaul of our financial system.For the last five years since [Regulation] NMS we have moved to amarket structure that no longer serves the fundamental investor.The market is full of tactical trading strategies. My biggest concern isa lot of one-off solutions, from the uptick rule to circuit breakers.We need to take a step back and take a look at the whole market.The SEC is beginning to do that with the concept release, but nowwhat happens? Will there be follow through?

WSL: What type of technology issues are you focused on right now?

CRONIN: We don’t fashion ourselves as high-frequency. Our timehorizon is not six seconds. We’re not trying to solve for pico- ornanosecond. But on the other hand, because the market hasbecome comprised of so many of these picosecond andnanosecond participants, we have to understand well how this armsrace is going to play out. We have to understand how our orders arebeing handled. [For instance, what happens] if we send an order toone place [that] subsequently sends it to another place thatsubsequently sends it to another? Who can see those orders andwhat potential information leakage can be from that? [We need toknow] how technology works with respect to transaction cost inparticular, and also in terms of what dark pools we can go to. The

focus is almost post-mortem of how orders are managed.

SACHS: First and foremost are the tools we need to better serve ourshareholders. A big driver of [technology changes] is also respondingto market structure—how we’re forced to trade these days versusdays in the past. The fact is there are 40-plus execution venues outthere where a stock may or may not trade.Given that, and given the short-term noise inthe market, and given the illusion of liquidityout there, most of what we’ve done is gettingbetter tools to find the liquidity we need tomake transactions. We can trade 4-5 billionshares of volumes in the markets in a givenday but I don’t think [the markets] are anymore liquid than they were years ago. If anything they’re less liquid;the depth of book has disappeared. What we need is a tool set toconnect anywhere and everywhere and to be able to monitor howour tools are doing in those marketplaces, what sort of gaming istaking place.

MOSES: Technology is an integral part of our business and advancesin technology have made it possible for us to easily invest in allasset classes, equities, fixed income, currencies, options, futures,etc. Technology has lowered transaction costs and improved pricediscovery and liquidity to name a few benefits. But we have alsoseen some of the negatives of technology as evidenced by the flashcrash in May.

Now that the majority of equity [trading] is done electronically,off the exchanges, there are not designated market makers whoseresponsibility is to provide an orderly market in stocks. One can seehow a disorderly situation could occur if participants in electronicexchanges who typically provide liquidity, but are not required to,step back from trading and liquidity disappears. Our responsibilityto our clients is to use technology to help us construct and managewell-diversified portfolios while minimizing transaction costs. Inaddition, we must protect and manage the risk that advances intechnology pose to our clients’ portfolios.

KANTERMAN: I think the biggest issues right now stem from theuncertainty. Companies don’t want to spend on new technologyand services until they have more clarity on the regulatory andcompliance issues in the pipeline. Most of the industry is in aholding pattern until they know exactly what will be needed. Thenthere will be a wave of spending on new technology and upgradesto match the new landscape. These types of dramatic changes andadvancements happen every 10-15 years.

WSL: What’s your take on recent market volatility andhow it is affecting your business?

WILLIAMS: It has been good for our business. We are looking totrade relative value, so when there are high levels of volatility, there

Judith Moses

Steve Sachs



18

is interest rate uncertainty and equity uncertainty—which leads toinefficiencies in the market place which lead to opportunities for usto exploit to our advantage. Market volatility is healthy.

CRONIN: Volatility has a high correlation with trading cost. Ourprimary objective is to lessen cost and maximize the value of eachdifferent investment idea. There are two types of volatility. There issystemic volatility, such as the volatile period with Greece and debt

crises around the world. The vacuum ofliquidity from that creates huge amounts ofintraday movements. The other type ofvolatility that’s more problematic is caused bymarket participants. That’s far morenefarious to us than systemic volatility. Thatvolatility is brought about by players lookingto make things more volatile because

volatility brings about more opportunities. To the extent you canclearly delineate one type of volatility from the other, [the betteryour] ability to maneuver around them. We spend a lot of timetrying to figure out why certain stocks trade as they do. We have tofind the right trading tools and talent.

SACHS: Like all institutional investors, you’ve got to learn how to cutthrough the noise and figure out what the fundamental drivers [ofa stock] are. From our perspective, volatility can be a double-edgedsword. It can help create entry points for a particular investmentthat can be beneficial. But at the same time it creates noise that hasnothing to do with the fundamentals of the company. It can beboth an advantage and a disadvantage. It is one more layer ofcomplexity versus what we were faced with five to 10 years ago.

MOSES: Most of our clients are long-term investors. When we buystocks for our clients, we are doing so with the goal of sharing in thefuture profitability of those companies in which we invest. Ourtypical holding period is at least one year, which is more tax-efficient for our clients. This is in contrast to many other marketparticipants who have holding periods as short as 30 minutes andare liquid every night. Because these participants are looking tocapture profits through trading, as opposed to investing, I believe itadds to market volatility. With the recent market volatility, we haveseen increased correlation among stocks which makes it moredifficult to add value through sector or security selection.

KANTERMAN: I don’t think anyone in the industry was trulyshocked by the Flash Crash on May 6th. We all understand thattrading speed has dramatically increased of late with all the high-frequency traders, ultra-high-frequency traders, algos, dark pools,etc, and that a bump in the road was possible, if not probable. Infact, the SEC had already been working on a major study regardinghow market structures had changed as a result of new technologies

and venues—the first major look at equity markets since theintroduction of Reg NMS, which actually paved the way forcompetition between venues. What recent volatility has done isbring the issues to the forefront with a wider audience. Now thatthe concerns are being profiled in mainstream media, there is morefear and trepidation by the average stock market and mutual fundinvestor. This at a time when confidence is still being restored fromthe 2008 credit crises.

WSL: If you had one wish that would be granted inrelation to your business, what would you ask for?

CRONIN: What I’d wish for is a regulatory structure that trulyunderstood what was trying to be accomplished. Are we of theopinion that the U.S. capital markets should be about capitalformation—for long-term investors who are trying to invest for savingsand college? Or are we more about this casino type [of trading] where70-plus percent have no real interest in the stocks they buy for fiveseconds? Let’s understand what we want to be. My guess is for [the]capital formation process, and then such regulations and protectionswould be put in place to best serve those types of participants.

WILLIAMS: Our biggest challenge is that weare a strong, mid-size firm that is not large assome. Our team strength and skill is equallycapable of competing with large firms. Wewant institutions to wake up and see that wecan handle them.

MOSES: If I were to take that literally, I would ask for the proverbialcrystal ball. In lieu of that, I would like for policy makers to thinklonger-term, instead of to their next election. We need a regulatoryframework that promotes fair competition, but not excessive risktaking. We need policies that promote long-term growth, but arenot overly complex. In my opinion, reactionary policies withunintended consequences have created this atmosphere ofuncertainty and increased market volatility.

SACHS: I think we need to take a serious look and have seriouschanges made to overall market structure and return the markets tomore fundamentally-driven and capital-formation focused asopposed to pure trading mechanisms. There are so many ancillarybenefits to that and so many ancillary detriments to the currentmarket structure. We’ve obviously had some big events—not justthe credit crisis and the Flash Crash, but all those days in between,from late ’07 onward. We have plenty of evidence that the marketstructure has to be looked at and I would be very disappointed if wemissed this opportunity.

KANTERMAN: I wish I knew the right and wise thing to wish for. Orelse, three more wishes.

Kevin Cronin

Basil Williams


Deutsche Bank Equity

This advertisement has been approved and/or communicated by Deutsche Bank AG London. The services described in this advertisement are provided by Deutsche Bank AG or by its subsidiaries and/or affiliates in accordance with appropriate local legislation and regulation. Deutsche Bank AG is authorised under German Banking Law (competent authority: BaFin – Federal Financial Supervising Authority); regulated by the Financial Services Authority for the conduct of UK business. Securities and investment banking activities in the United States are performed by Deutsche Bank Securities Inc., member NYSE, NASD and SIPC, and its broker-dealer affiliates. Lending and other commercial banking activities in the United States are performed by Deutsche Bank AG, and its banking affiliates. © Copyright Deutsche Bank 2010.

Smarter Liquidity with SuperXSuperX is Deutsche Bank’s dark liquidity seeking algorithm. In a world of increasingly complex and rapidly evolving electronic markets, you need a partner with the smartest algorithm to access the deepest pools of liquidity. Your executions need to balance the efficiency of extracting liquidity while reducing market impact and maintaining anonymity. SuperX is dark trading made intelligent, bringing you a quantitatively engineered Smart Allocation Model to protect your order from the risks of gaming, information leakage or adverse selection. Now there’s a more intelligent choice for dark liquidity, Deutsche Bank.

autobahnequity.db.com Bloomberg: DBEQ <GO>

ALGO2010-Deutsche.indd 1ALGO2010-Deutsche.indd 1 8/31/10 3:53 PM8/31/10 3:53 PM

ALGO-BofA Merrill.indd 1ALGO-BofA Merrill.indd 1 9/1/10 5:01 PM9/1/10 5:01 PM

Electronic & Algo Tading Report

Education

Transcript of Electronic & Algo Tading Report