Wedbush Securities Inc., an investment bank founded in 1955 whose clients include dozens of high-frequency traders, created a group to give asset managers faster access to markets, according to a company executive.
The Los Angeles-based company introduced a new business unit called the Execution Solutions Group to deliver trading technology to investment managers buying and selling directly in the markets, Jeff Bell, an executive vice president at Wedbush Securities, which has about 900 of parent company Wedbush Inc.’s approximately 1,000 employees, said in a phone interview. The system has about 10 institutional clients, including some of the bank’s legacy customers, he said.
“We’re taking a high-frequency trading infrastructure used by automatic, systematic traders and opening that up to institutions” on what’s traditionally called the buy side, which includes hedge funds, mutual funds and asset managers, Bell said. “That’s a common complaint among the buy side and critics of high-frequency trading -- that these guys have capabilities that aren’t available to institutions.”
Trading rapidly has become more important as orders have spread out across 13 U.S. equities exchanges, several alternative venues and a few dozen private broker-run markets. Regulatory changes since the mid-1990s spurred competition and led exchanges to become more electronic, with orders dispersed across venues instead of centralized on the New York Stock Exchange or handled by dealers on the Nasdaq Stock Market.
Wedbush was the third-largest provider of orders on Nasdaq last month for that exchange’s listed companies, after Morgan Stanley in New York and Bank of America Corp. in Charlotte, North Carolina, according to data published by Nasdaq OMX Group Inc. From July 2010 through June 2011 it was the number-one provider of liquidity for Nasdaq companies, the data show.
About 55 percent of U.S. equities volume comes from firms using high-frequency or computer-driven trading strategies, Adam Sussman, a partner and director of research at Tabb Group LLC in New York, said in December. Wedbush estimated last August that about 75 percent of equities volume came from automated firms in the first third of that month when the Chicago Board Options Exchange Volatility Index, or VIX, climbed to an average of 32.69 and the Standard & Poor’s 500 Index slid 13 percent.
The VIX’s average over the past 10 years is 21.84, data compiled by Bloomberg show. The gauge measures the cost of using options as insurance against declines in the S&P 500.
Wedbush will use technology from Lime Brokerage LLC, a platform it bought last June that offers execution services to almost 90 automated traders including those employing high-frequency strategies to profit from price differences or anomalies in the market. Bell, who runs the clearing business at Wedbush Securities, which processes transactions for about 140 firms including about 40 high-frequency or automated trading firms, is also chief executive officer of Lime, an affiliate owned by the parent company.
Asset managers sending orders through the Execution Solutions Group will use the firm’s high-speed trading servers, market data and network that relays orders to exchanges or other venues, Bell said. He declined to predict how many clients the unit may have by the end of the year.
Customers using Wedbush’s new execution services offering can pay for it through a traditional per-share fee or on a cost-plus basis that allows a lower payment per share while passing on the trading fees that exchanges charge and the rebates they provide to those supplying bids and offers, Bell said.
The cost-plus service allows hedge funds and other clients to keep the rebates their orders generate on exchanges when they wait passively for trades and pay when they grab orders others have provided to the market at specified prices, Bell said. Users of the service must pay the fees and get the credits they qualify for themselves on exchanges that have tiered pricing based on volume, Bell said.
“Trading would be fairer if the execution costs of brokers could be directly passed on to customers,” Justin Schack, managing director for market structure analysis at New York-based Rosenblatt Securities Inc., said in a phone interview. “That’s a real source of conflicts of interest.”
The conflicts result because brokers have choices about how to execute customers’ orders and where to send buy or sell requests, Schack said.
While they have an obligation to get clients the most advantageous overall transaction based on existing market conditions, brokers whose systems decide where to send pieces of larger orders may consider factors including price, the number of available shares, stock volatility, the fee or rebate for trading on a particular venue, and the likelihood of getting an execution. They may also take into account how the stock price reacts to their trading on particular venues.
Earning a rebate or paying a lower fee may influence some brokers’ routing choices, just as partial ownership of an exchange may affect the decision to convey orders to particular markets, Schack said. Pricing is one of the main ways stock exchanges compete for orders from brokers as they seek to increase their share of trading in a U.S. stock market that has fragmented into as many as 50 different venues.
Customers that trade a lot can also pay Wedbush Securities a fixed amount every month and buy and sell as much as they want, Bell said. He declined to say how much the broker charges.
“These are meaningful changes,” Bell said about Wedbush’s pricing plans for asset managers. “A lot of these execution services have become commoditized and pricing at some brokers is not very client-friendly.”