Alpha Profiling Helps Trader-PM Relations

As the order volume and speed of trading continues to increase, buy-side traders are tasked with the increasingly difficult chore of staying in sync with their portfolio managers. In this day and age, it's extremely difficult for traders to stay in tune with their portfolio manager for every order on their blotter while still reacting to market conditions.

More often than not, traders look to execute the order as soon as possible. Better to err quickly than wait and end up having the market move away from you, leading to negative feedback from your portfolio manager.

Enter alpha profiling, a concept that has gained steam over the past few years on the buy side to alleviate this growing problem. The idea is to gather knowledge traders have about their portfolio managers to help them understand what orders are urgent and what are not and then set an execution schedule that is appropriate for that particular portfolio manager.

"It's not an end-all or be-all, or a cure for everything," says John Adam, Portware head of product management. "It's just a good practice to understand that at any given moment in time I'm not going to be able to watch every order, and I want to have a default set of instructions for those orders."

A Better Argument
Alpha profiling offers, according to Adam, the best kind of argument one can present for speeding up or slowing down trading during the day through set numbers and an expected outcome.

Anything that is streamlining the traders' blotter and enabling them to act quickly on the right kind of signals and information is going to add value to the buy-side trader and their desk. - John Adam

At its core, Adam says, alpha profiling addresses a common goal among traders on the buy side: The ability to filter out the noise, find the right indicators and adjust their performances so they meet the wishes of their portfolio managers.

"Anything that is streamlining the traders' blotter and enabling them to act quickly on the right kind of signals and information is going to add value to the buy-side trader and their desk," Adam says.

Portware's current alpha profiling offering, Alpha Vision, looks at over a hundred different factors, according to Adam. Volume pattern, the distribution of where a stock is getting executed and the liquidity available at different exchanges and venues are taken into account.

"The idea is to leverage real-time market data to assist the trader to make that decision through quant analysis given the knowledge of historical order flow and market data at the time of trade arrival," says Henri Waelbroeck, director of research at Portware.

All of this will help a trader understand why they should start in a dark pool and then move towards relative participation or switch from one algorithm to another while trying to execute an order.

Throughout the process, measurements are taken frequently and adjustments are made, part of what Adam calls the learning agent. By constantly assessing the market and making changes to tactics, it offers the trader better prices.

Solid Savings
The cost benefit from better execution via alpha profiling is why Adam says he's seen some of the largest firms adopt the process. While most people are prone to think big institutions are slow to adapt, Adam says the amount of money that can be saved by top-tier firms implementing alpha profiling on even just a third of their trades is too good to turn down.

Adam says two-thirds of Portware's customers have some form of alpha-profiling in place, which he admits is a self-selecting group as Portware's clients are already looking for increased levels of automation.

Whether or not alpha profiling can truly break into the mainstream hinges on two factors, according to Adam. Buy-in from the middle market, adoption in other asset classes or a combination of the two will spur more firms to begin practicing alpha profiling.

"You have the over-the-counter (OTC) market like foreign exchange (FX) and bond trading that are in dire need for this kind of discipline," Adam says. "Equities, by sheer virtue of having adopted electronic trading a decade earlier over some other asset classes, had a head start. But it's not going to take half as long for FX or bond trading to catch up to where equities are, should the trading evolve that way."

The Bottom Line

· The idea of gathering information about portfolio managers to help traders execute orders better, also known as alpha profiling, is gaining support amongst buy-side firms.

· While alpha profiling isn't a solution for all types of trades, it does offer support to buy-side traders that are inundated with heavy volume at increasing speeds.