Bloomberg launches new algorithm

Bloomberg on Monday announced the launch of a new algorithm for fund managers to automate the process of rebalancing their portfolios without the help of a brokerage trading desk, as it continues to expand its trading business.

The tool, part of Bloomberg Tradebook, an agency brokerage, is aimed at equity portfolio rebalancing or so-called "programme trades". That is when funds buy and sell baskets of securities to shift allocations between sectors and geographies to match their investment strategies and mandates.

Most trading algorithms, which have recently attracted regulatory scrutiny following the May 6 "flash crash" sparked by an automated trading order, are sold by investment banks such as Credit Suisse and Goldman Sachs, as well as traditional agency brokerages such as ITG.

But research from the Tabb Group says that only 65 per cent of trades will be "high touch" in 2011, or routed through sell-side trading desks. A slump in trading volumes and new regulations have also made brokerages anxious about the future of their equities trading businesses.

Bloomberg says its offering is aimed directly at buy-side traders, and will allow them to bypass sell-side trading desks by connecting to liquidity in 70 venues and 41 countries.

"Our aim is to change the game and give some power back into the buy side. Rather than sending trades to a sell-side desk, they want more control over how they trade, and more transparency about how it is being executed, and in what venue," said Ron Taur, global head of algorithmic trading at Bloomberg Tradebook.

The algorithm aims to reduce risk and expense of portfolio trades by automatically adjusting trades to reflect moves in currency prices, as well as tracking exposures to small trades and multiple trading venues, such as so-called "dark pools".

Bloomberg Tradebook last year named Ray Tierney, the former head of global equity trading at Morgan Stanley Investment Management, as chief executive, and he has been driving the group's expansion. Last year Tradebook launched the B-Dark algo, which tracks trades in dark pools in real time.

Programme trades are seen as a key market, as they are increasing in popularity. More investors are turning to passive strategies as asset class and sector correlations are at historically elevated levels, often cited as a symptom of the market's lingering risk aversion following the financial crisis. Tabb estimates that 30 per cent of all investing is now passive, the highest level it has ever been.

The New York Stock Exchange says that programme trading, defined as trades of baskets of at least 15 stocks, made up 31.8 per cent of its volume from December 27 to December 30, the most recent period for which data are available, and on par with typical share in 2010.

"It makes sense that as firms are doing more passive investing that they would invest more in algorithms, because active trading and sourcing liquidity independently can raise trading costs," says Matt Simon, a senior analyst at Tabb.

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