Alpha - September 2007 - (Page 80)

Top Trading Firms actions by breaking up trades into small pieces and distribut- action and expertise are emerging as the clear winners. ing them anonymously among a variety of different exchanges “While we were investing in electronic trading, we were and trading venues, proved fallible. When they did, the top also investing in customer-oriented traders within our tradibrokerage ﬁrms had human traders ready to step in. tional desk,” says Peter Forlenza, co-head of global equities “Technology can only go so far, and it is critical to marry for Banc of America Securities in New York. He says the ﬁrm technology with the right model for client coverage and sup- encourages its traders to have direct contact with hedge fund port,” says Rishi Nangalia, a vice president for product devel- managers and to share any insights they glean from the secopment with Goldman Sachs Execution & Clearing. “We tors in which they trade. “The commoditization of execution have made a substantial investment in proactive education has created the need for sales traders who can add value.” and support tools, platform support and people.” In recent years analysts such as Sanford C. Bernstein That investment has paid off for Goldman, Sachs & Co., & Co.’s Charles (Brad) Hintz have warned that electronic the hands-down winner among brokerage firms in Alpha’s trading will allow low-priced brokers to steal their more Top Trading Firms, our inservice-oriented counteraugural ranking of the parts’ business, eventually world’s top equity trading driving the latter out of busiservice providers, as judged ness. Part of this prophecy by the hedge funds that use seems to have come to pass: Here are the brokerage ﬁrms that hedge funds say provide the them. Thanks to the comOnly about 47 percent of best overall trading service, based on their expertise and market bination of its marketglobal daily trades now go to knowledge, traditional execution, algorithmic trading and electronic trading services. leading RediPlus trading the cash sales desk for tradiplatform, which is used by tional execution, according Rank Firm roughly half of the industo data collected by Westbor1 Goldman, Sachs & Co. try’s traders, and a legion of ough, Massachusetts–based 2 Credit Suisse live traders, Goldman ranks research firm Tabb Group, 3 Banc of America Securities No. 1 in three of the four while the rest are routed to 4 Morgan Stanley categories in which we various program and algo5 Bear, Stearns & Co. asked managers to rate rithmic trading desks, direct their brokers: Electronic market access channels and 6 UBS Trading/Direct Market Accrossing networks. By the 7 Lehman Brothers cess, Trading Expertise & end of 2008, Tabb estimates, 8 Citi Market Knowledge and electronic trading will ac9 Deutsche Bank Traditional Execution. count for 64 percent of all 10 Merrill Lynch Goldman is second in Alorders and, as a result, the gorithmic Trading — the total flow of commission fourth category — behind top-ranked Credit Suisse, which dollars to the sell side will decline by approximately $1.7 bilis No. 2 in the overall ranking. Rounding out the top five lion, to $10.5 billion annually. overall winners are Banc of America Securities, Morgan StanTrading costs remain an important factor in the choice of ley and Bear, Stearns & Co. brokers. They are just no longer the most important part. To determine what hedge funds value most in their trading Adam Sussman, an analyst with Tabb, expects traders will inrelationships and which brokers are delivering, in the run-up to creasingly direct order ﬂow to brokerages that commit capital the market’s summer chaos Alpha surveyed nearly 300 hedge and generate alpha-producing ideas on top of execution. “The fund firms — a group representing roughly $3 billion in an- buy side wants more capital, more research, more corporate nual equity trading commissions and more than $400 billion access, more trading technology and more of everything else,” in single-manager hedge fund assets under management. Sussman wrote in an October 2006 report. The competition among brokerage firms for hedge fund In fact, William Sterling, head of algorithmic trading for dollars is fierce. Although speedy electronic execution is still UBS (No. 6 in the ranking) says the summer volatility has altheir main offering, many firms are bolstering their support ready spurred change — causing hedge funds to rethink their services — from training the sales desk to provide better trading habits and the relationships that support them. portfolio-specific advice on making block trades to simply “The more volatile the market gets, the harder it is to trade educating frequent electronic traders about new and better and the bigger the difference you see between those who do it ways to use their algorithms — and it is these features hedge well and those who don’t,” says Sterling, who is based in fund traders are increasingly using to determine which Stamford, Connecticut. “We’ve heard from clients that providers they will use. In the wake of the confusion that this quality is really separating the providers.” summer’s surge in volatility created for algorithmic trading Buy-side traders say they are seeing a noticeable distincplatforms, traders now more than ever are looking for an extra tion between proven trading programs enhanced by human level of support for their orders. The ﬁrms with the resources participation and expertise, and more rudimentary offerings. to provide both state-of-the-art technology and human inter- When the markets are calm, the added value of human in- TOPEQUITY TRADING FIRMS 80 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2007

Table of Contents Feed for the Digital Edition of Alpha - September 2007

Contents Letter from the Editor Longs & Shorts Pension Corner: Keeping the Faith The Good Guys: Going Public Interview: Barry Bausano - A Delicate Balance Cover Story: Cruel, Cruel Summer Profile: Phil Cooper - Alternative Flight Plan Strategies: Marshall Wace - TOPS in Its Field Profile: Fortis Investments - Banking on Alternatives Research Center: Top Equity Trading Firms Alpha Bytes: Desktop Duel Unhedged: Commentary - The Taxman Cometh

Alpha - September 2007

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