Institutional Investor's Alpha Magazine - September 2008 - (Page 67)

Top Trading Firms February. Stamford-based SAC Capital Advisors alone spends as much as $400 million a year on equity-trading commissions (SAC has $16 billion in assets under management). To cash- strapped banks hurt by the credit crunch, such potential proﬁts are obviously attractive. “The Street is anxious to get that business,” says Barry Colvin, vice chairman of Balyasny Asset Management, a $2.5 billion Chicago-based multistrategy hedge fund ﬁrm that specializes in high-volume equity trades. Big funds are increasingly picky about who they do business with, however. “Every hedge fund wants lower commission costs and lower financing,” Colvin says. “But more and more you need people. Hedge funds need a fuller relationship.” Counterparties are also more selective than they used to be. “The banks are becoming much more focused on which clients they want to deliver their resources to,” says Credit Suisse’s Martins. Rather than accepting any client who walks through the door, banks are increasingly keen to work only with funds that provide lots of revenue. They do so at the expense of the smaller end of the hedge fund market. Not surprisingly, funds of all sizes are paying more attention to relationship-building. A report published in May by Westborough, Massachusetts, research and consulting ﬁ rm Tabb Group found hedge funds becoming increasingly choosy in how they allocate commissions. In a sign of how seriously big ﬁ rms are taking such relationships, D.E. Shaw & Co., a $39 billion New York– based hedge fund ﬁrm, in July hired Thomas Levy, who pre viously worked in Morgan Stanley’s prime brokerage unit, to oversee its counter party relationships. In January, Renaissance hired James Rowen, SAC’s former CFO, who was previously head of Deutsche Bank’s prime brokerage business, to play a similar role as chief operating ofﬁcer. Technology remains a huge factor in hedge funds’ judgment of the best equity-trading ﬁrms. Electronic connectivity, direct market access and algorithmic trading all continue to play important roles in shaping the competitive landscape. Goldman Sachs, No. 3 in Electronic Trading/DMA, has leveraged its Redi Plus tech nology platform to maintain its strong market position in equity trading among hedge funds. RediPlus, which Goldman acquired through its 2000 purchase of market-making ﬁ rm Spear, Leeds & Kellogg, is used by about half the traders on Wall Street. Credit Suisse’s ascent to the top of this year’s survey is fueled by its algorithmic trading. The Swiss bank was early to develop a robust electronic trading platform and has been especially effective at building algorithms that are efﬁcient at ﬁnding liquidity in dark pools. Still, Credit Suisse ﬁnishes second to Banc of America in Algorithmic Trading. Unlike the ﬁ rst generation of execution algorithms, which were typically unable to cope with vola tility, BofA’s current offerings have performed well in the Compiling the Ranking Alpha complied its second annual ranking of the Top Equity Trading Firms based on voting in the spring and early summer by more than 300 hedge fund ﬁrms. Brokerage quality was broken down into four broad functional areas — Algorithmic Trading, Electronic Trading/ Direct Market Access, Traditional Execution and Trading Expertise & Market Knowledge — each of which included a series of speciﬁc points of service on which hedge fund managers evaluated their brokerages. Respondents also rated the importance of each broad functional category, the result of which was then used to calculate the overall winner, rewarding ﬁrms that do well in the tasks hedge funds prize most. In the accompanying tables we rank only those ﬁrms for which we received a minimum number of responses. Alpha’s 2008 Top Equity Trading Firms survey was conducted by Research Specialist Timothy Roberts with Associate Editor Julia Leikin, under the guidance of Assistant Managing Editor Sathya Rajavelu and Senior Editor Jane B. Kenney. choppy markets. “Algorithms have worked, and they are on the rise,” says New York–based Ciaran O’Kelly, head of global equities at BofA. But even in the realm of electronic trading, people are playing a bigger role. “There is a lot more dialogue and a lot more partnership between asset managers and sell-side traders, particularly on the larger port folios,” O’Kelly says. “The role of the trader is more consultative now than it ever has been — there is an intersection of the traditional trading desks and algo trading.” Though hedge funds remain eager to tap electronic trading to help cut costs, they still need the ser vices that come with a more expensive, high-touch approach. The Tabb report found that although the hedge fund migration toward electronic execution persists, it is “slowing to a crawl.” The report estimates that by 2010 one quarter of all hedge fund deals will still be conducted through traditional trading desks. Savitz, the Greenwich Prime co -founder, is among those who argue that electronic trading has actually hurt the marketplace. “People are fooling themselves if they think the machines have made trading cheaper,” he says. The market, Savitz insists, is less liquid than ever, and orders are harder to execute. “The system is broken right now,” he says. The preference among many managers for a hands-on relationship helps explain why Jefferies, which began to develop electronic trading capabilities after most competitors did, makes such a strong showing this year. Traditionally a provider to small and midsize hedge fund ﬁrms, Jefferies is going after bigger ﬁsh these days. To increase its global reach, the ﬁrm this month hired 25 former Bear Stearns equity professionals for its London ofﬁce. “Customers are looking for idea f low,” says Jason Grifﬁth, head of global equities at New York–based Jefferies. “They’re looking for people they can trust with large orders.” SEPTEMBER 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 67

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - September 2008

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

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