Alpha - September 2007 - (Page 81)

volvement and knowledge can be difficult to detect; but during turbulent trading periods like this summer’s, the slightest variation in trading service can be critical to a fund’s success or failure in executing its strategy. “A year or so ago, when the markets were fairly stable and quiet, it was hard for clients to really tell the difference between two algo providers,” says Sterling. “But there’s a lot of complexity in how the market is trading now, and some assumptions just don’t hold true.” As the Chicago Board Options Exchange volatility index surged over the summer, program traders who had built their models to generate alpha in the era of relative calm inaugurated in 2002 had to scramble to cope with high volatility levels. Meanwhile, hedge fund portfolios themselves have become more complex over the past five years, forcing fund managers that have moved far aﬁeld from long-short U.S. equity strategies to incorporate more data on a wider array of asset classes — exotic options, futures and foreign securities, to name a few — to adapt their trades to the new environment. Add in the fact that a large number of funds were trying to adjust their hedges at once, and incremental advantages of speed, ﬂexibility and execution started adding up. None of these changes have been lost on Goldman Sachs, which has clearly hit the formula for success through the integration of human expertise with its RediPlus system — which it inherited in 2000 as part of its $6.5 billion acquisition of brokerage firm Spear, Leeds & Kellogg. Unlike captive systems that limit traders’ options, RediPlus has evolved into a comprehensive portal that can route an order for electronic execution to a cash desk or even to another brokerage. On an average, day traders route simple orders through the system’s electronic broker — seeking the best prices and lowest fees — while more complex orders tend to be routed to preferred block traders who can manually execute orders. In times of heavy volume or high volatility, traders tend to mix and match execution channels. “Our prime brokerage franchise has been a tremendous source of business, from an electronic trading perspective,” says Gregory Tusar, Goldman’s head of electronic trading in New York. “There’s a natural, symbiotic relationship.” Traders, he adds, are looking for increasing interaction between the ﬁrm’s traditional and electronic businesses. This summer, Goldman’s agency traders were especially helpful to the electronic business by generating research on which algorithms traders should and should not use in such turbulent conditions. Other brokerage firms have been employing similar tactics. “We don’t divide the world into the old categories anymore,” says Daniel Mathisson, who runs Credit Suisse’s Advanced Execution Services algorithmic trading unit in New York. “We think the markets are moving toward a model where it’s the risk desk versus the agency desk, and where the On the Web Please visit our Web site, www.alphamagazinerankings.com, to find the Top Trading Firms rankings, as well as more features, including the 2007 Hedge Fund 100, Alpha’s annual list of the biggest singlemanager hedge fund ﬁrms in the world. agency desk will be almost entirely electronic,” he says, highlighting the contrast between the human intervention involved with risk desks — where trades are monitored and, when necessary, flagged as potentially unusual or outside a fund’s overall risk proﬁle — and agency desks. Credit Suisse takes a high-tech, high-touch approach to trade execution. Hedge funds are particularly fond of the additional support and expertise the firm provides for its algorithmic trading platform, which is designed to reduce market impact by breaking big trades into smaller pieces. “You’re still trading automatically, anonymously and immediately, but the level of service is high and there’s a lot of human interaction available when you need help,” says Credit Suisse’s Mathisson. Like many full-spectrum brokerages, Credit Suisse automatically scans incoming electronic orders against the risk management limits each client sets. Orders that violate those limits are ﬂagged by the system and kicked up to the client coverage desk, which is staffed by veteran traders. When an order is ﬂagged, the client is contacted to be sure the trade is intended. For orders that are legitimate, Credit Suisse’s consultants offer assistance in determining the best possible execution approach. Such human interaction proved its value this summer, when “The agency desk will be almost entirely electronic,” says Daniel Mathisson, head of Credit Suisse’s Advanced Execution Services algorithmic trading unit. SEPTEMBER 2007 • INSTITUTIONAL INVESTOR’S ALPHA • 000 INSTITUTIONAL INVESTOR’S ALPHA • 81 MONTH 2004 http://www.alphamagazinerankings.com

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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