Date: December 8, 2003
Publication: Trading Technology Week By: Daniel Safarik and Eugene Grygo

Program Trading Appeal Broadens

NEW YORK--Program trading, or the complex trading of large portfolios of securities in combination with offsetting positions in futures contracts, is not just for the big firms anymore.

Small-to-medium-sized firms are embracing program trading in large part because the technology has moved downstream, bolstered by the more affordable Linux-Intel-based software and systems needed to support program trading. The buy side also prefers the lower commissions of program trading, and the major broker/dealers have been pushing their clients to adopt program trading.

Thus the levels of program trading are on the rise, peaking at 51 percent of volume on the New York Stock Exchange (NYSE) in June 2002, according to market researcher Celent Communications. In fact, since the NYSE began tracking program trading in December 1999, the weekly volumes via NYSE have doubled from an average of approximately 20 percent to where it currently hovers at approximately 40 percent. Most pundits expect that rate to rise.

In keeping with this trend, firms such as agency broker Rosenblatt Securities, the Schonfeld Group in New York, and Milan, Italy-based TradingLab are making great strides in program trading.

Rosenblatt is slated to announce this week that it has been using software from FlexTrade Systems since October to help the firm strengthen and expand its program trading activities. The new technology combined with program trading strategies will give the firm a magnitude boost, says Joseph Gawronski, Rosenblatt Securities' chief operating officer (COO).

"FlexTrader helps us compete for a whole new set of clients and improves our execution performance versus our benchmarks for our current clients," Gawronski says. Rosenblatt trades listed and over-the-counter (OTC) securities and portfolios for its money manager and broker-dealer clients. Rosenblatt's four upstairs traders and eight floor brokers and clerks on the New York Stock Exchange (NYSE) are no strangers to program trading. "The new level is 20 to 30 million shares per basket--an order of magnitude greater than the 2 to 3 million share baskets we historically handled," he says.

The FlexTrader application can be used for pre-defined trading strategies and tactics for lists as well as single stocks. The software is targeted at agency trading, index arbitrage, and proprietary as well as standard strategies such as volume-weighted average pricing (VWAP), transition trading, pairs and long/short trading.

The move to FlexTrader required Rosenblatt to implement the X-Window software from Hummingbird Communications for its desktops, and move to the Red Hat distribution of the open source Linux operating system running with Dell hardware. "The traders spent a lot of time with FlexTrader before we went live. We were able to discover the strategies that will work best," Gawronski says.

Like Rosenblatt, Schonfeld, a New York-based trading firm with 700 proprietary and 500 customer traders, has made a major commitment to program trading over the years, including a proprietary access protocol and a distributed computing architecture to ensure that it can remain competitive, officials say.

Schonfeld has many customers that plug their own trading models into Schonfeld's access framework, which facilitates order entry into ECNs, Nasdaq, NYSE and regional exchanges. The framework, dubbed the Hubb Gateway, uses a fixed-width proprietary protocol, Hubb, for access, says Lee Maschler, executive vice president, program trading at Schonfeld & Co., Schonfeld's customer trading service.

"FIX uses tags, and what happens is you have to look through the whole message to find the tags, and with fixed-width you know what you're looking for is always in the same spot," Maschler says. It takes users about two to three weeks to connect and certify on HUBB. Maschler says HUBB most closely resembles Island's OUCH protocol for order entry.

The firm is stressing speedy executions and has built a load-balancing function for its group of distributed 2.4 GHz Intel "off-the-rack" machines running Red Hat Linux.

Maschler doesn't expect that human traders will be disintermediated anytime soon, even as program trading is taking off. However, Schonfeld officials say the trader of the future will be an increasingly mathematical, rather than instinctual, thinker and actor.

Program trading is symbiotic and will require a human element as well as technology. "You can't have a great set of algorithms without the right technology. They go hand-in-hand," says Rob Hegarty, an analyst for market researcher TowerGroup.

The technology, though, can improve upon the human reactions as Stockholm, Sweden-based Orc Software is attempting with its Liquidator platform. Liquidator automatically executes orders set up within pre-determined parameters, based on price differences that the human eye is too slow to identify.

Liquidator is a server-based platform that users can program through a "Visual-Basic-like" proprietary language, which then compiles and deploys commands in Orc's native C code "on the fly," says Jonas Hansbo, CTO of Orc. "Traders can affect the logic by changing the parameters. They can use volatility offsets, turn auto-trading on and off, and, on the fly, create new graphical user interfaces. Fortunately, there is also a big red 'panic button' that can stop the action."

Orc built Liquidator because its core platform Orc Trader's client-server architecture "had limits as to where it could go," Hansbo says. Orc Trader was built in 1994 on a Sun Microsystems Solaris back end, with a front end in NeXT Software's OpenStep, an arrangement that slowed speed because the heavyweight clients, customized for each trader, carried some of the calculation burden.

Liquidator offers only a "monitor control facility" for parameter changes on the client side, and while other Orc products use an Informix database, Liquidator uses an in-memory database, which also increases speed, Hansbo says. Although the application can run on any Posix thread, performance requirements dictated the use of a 64-bit operating system in Solaris 8.0 and 9.0, and have curtailed Orc's excursions in Linux so far.

Orc began working on creating a program-trading ready platform two years ago, in conjunction with TradingLab and two other clients, Hansbo says. TradingLab was already an Orc Trader customer, using it for quoting and position-keeping in derivatives and in bonds, confirms Luca Lancelloti, front office application manager, TradingLab.

TradingLab had been creating bond and equity derivatives prices in Microsoft Excel spreadsheets and sending them through a system from Italian vendor ATS. After Orc designed Liquidator with TradingLab, between July and September, TradingLab was able to stop using Excel for all but bond pricing, and these prices are fed into Liquidator as well, Lancelloti says. ATS developed a message bus for TradingLab to link APIs for Liquidator, Excel, news feeds and connections to clearing services.

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