Vision for the Future
The primary trend we are noticing is the use of client commissions. The SEC's final guidance on section 28E relaxed the standards on the provision of research.
That's enabled better use of commission-sharing arrangements (CSAs). We are taking advantage of that change and the overall regulatory framework by setting up CSAs through many of our larger broker-dealer counterparties, which allows us to separate our execution portion of the commission budget from the research portion of the budget.
Fun Facts
Tell us something interesting that few people know about your professional or personal background.
The one thing I have done in my personal life that typically surprises people is that when I was at Georgetown, I was a DJ for a college radio station on a rap show.
INTERNATIONAL TRADING
In which international markets do you trade?
We pretty much trade every international market. We run the gamut from large-cap strategies and emerging-market-type strategies across value, core and growth styles. We have five traders dedicated to the international process - two trade at night in the Asia, Australia and New Zealand markets.
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The Boston Company Asset Management
1 Boston Place
Boston, MA 02180
Assets under management:
$67 billion, which includes mutual fund and institutional assets.
Daily volume in equities:
Typically in our domestic strategies we are trading approximately 7 million shares a day in single-stock and program orders. On the international side, our daily volume is approximately $200 million in principal value.
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Fund(s) for which you trade:
We subadvise for several of the Dreyfus funds and Dreyfus Founder funds.
Types of products traded:
We trade mainly equities here and have small exposure on the derivatives side through futures and options. We recently expanded our footprint in the alternative investment space through a couple of hedge fund start-ups. We are looking to get more involved in that space. As we expand on the alternative investments side, I would expect our derivatives trading activity to increase as well.
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Structure of trading department:
On the domestic side, we are structured by market cap; we have four traders that handle domestic strategies. I'm typically backing up the domestic side these days. We're organized where a couple of traders handle small- and mid-cap strategies and one handles exclusively large-cap strategies. On the international side, we have five traders. Everything is traded out of Boston. We are structured by region and then by developed or emerging markets.
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Previous Positions:
Prior to being named head of the desk I was senior trader of TBC from 1998 to 2000, supporting domestic small- and mid-cap value strategies. Prior to joining TBC, I traded for domestic and international strategies at State Street Research & Management from 1993 to 1997.
Education:
Bachelor's degree in international economics from Georgetown in 1990.
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TECHNOLOGY
Technology used to trade:
The overall desk budget does not break out a specific IT component, but we have never had any issues with accessing or obtaining applications that help us with the trading process.
Equities technology used:
We drive everything out of our OMS - Eze Castle's Traders Console. We are using FIX connectivity to about 95 percent of our brokers. We have ECNs and ATSs on the desktop. On the ECN aggregation space, we use Lava, UNX and Redi, and on the ATS side we have Liquidnet, Pipeline and ITG's Channel product - we're connecting to as many pools of liquidity as possible.
Derivatives trading technology:
We don't use any platforms currently. For derivatives, we are dealing mainly with our bulge-bracket counterparties and handling the volume more through traditional means by phone.
Chief Information Officer:
Eric Bloom
How do you work with your CIO when it comes to getting new technology on the trading desk?
It's fairly collaborative. We have two IT staffers dedicated to supporting equity systems. The bulk of their work is allocated to the trading desk and trading systems. When we take new products on the desk, they are typically helping us with analysis and infrastructure requirements.
LOOKING AHEAD
What trends/regulations/issues do you think will transform your role as a trader?
The integration of algorithmic trading, fragmented liquidity pools, the increase in dark pools and broker-sponsored ATSs will require the buy-side trader to work smartly and seek out liquidity in disparate locations. Technology will really be at the forefront to enable the trader to execute effectively, find liquidity and minimize overall transaction costs.
What do you hope technology can change to make your role easier?
The largest gap technology could help us resolve is our valuation of research. Client demand and regulatory interest is going to drive that process over the next few years, and it's going to be incumbent upon the investment managers to arrive at a valuation of both the executions services and the research services they're purchasing. Technology is going to help us fill that void.
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PORTFOLIO MANAGEMENT
Describe your relationship with your portfolio managers
We work closely with all of our PMs in their strategies. We try to ensure we capture as much of the alpha embedded in their decisions as possible, while trying to minimize overall transaction cost on the desk. Our execution style often runs in tandem with what the PM is trying to accomplish. Technology has enabled us to further integrate that relationship through transaction cost analysis. It's enabled a dialogue that's offered insight into the execution process to pinpoint better ways to execute an individual strategy and minimize overall transaction costs.
ALGORITHMS
Types of algorithms used to trade:
I would say the primary type of algorithm we are using on the desk is implementation shortfall. We are using algos exclusively for equity trading at this point. We have broker connectivity directly out of our OMS, and we also utilize Electronic Service Provider (ESP) for single-ticket and clearing purposes.
Which algorithms do you use most often? Is that changing?
It hasn't really changed. We are primarily experimenting and executing through implementation shortfall algos. That is due to the use of the IS benchmark in our TCA process and the way our investment strategy is set up internally. Of late, we have actually started to look toward the liquidity-seeking strategies as well, such as Piper's Fusion strategy or Banc of America's Ambush, where a lot of our domestic turnover is directed from small- to mid-cap strategy. So liquidity is a critical concern for us.
Which brokers' algorithms do you use?
We use bulge-bracket offerings such as Credit Suisse's AES, Morgan Stanley, Bank of America and Merrill Lynch's products. We also use more niche products, such as Piper's and EdgeTrade's products.
Do you build your own algorithms?
We have not gone down that road yet, mainly because we've had pretty good success with off-the-shelf products and some of the niche players whether an EdgeTrade or a Piper Jaffray.
How do you rate your brokers and determine which broker gets your order flow?
It's becoming a cleaner decision than it has ever been as we separate the research budget from the execution budget. The primary considerations are the availability of natural liquidity, the performance of the brokers' execution capabilites on past executions, connectivity to the broker (whether we can route over FIX), whether or not they can handle orders discreetly without disclosing too much to the market, and whether or not they can provide capital to facilitate liquidity in thinly traded names.
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Interview by Daniel Safarik, Contributing Writer
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