Algorithmic Trading
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Goldman Emerges as Global Algo Leader
April 3, 2007
As Wall Street traders continue to expand their use of algorithms, bulge-bracket firms have been flexing their muscles to remain a major force as providers and promoters of these models and related tools. These brokerages account for 65 percent of algorithmic trading volume, according to research firm Aite Group, and a handful of well-funded and savvy leaders in the bulge-bracket camp have emerged, including Goldman Sachs Group.
In a report titled "Bulge Bracket Firms & Algorithmic Trading: The Big Get Bigger," published by Aite in November 2006, Goldman Sachs is cited as a leader among sell-side algo providers, boasting upward of 2,000 clients, ahead of Credit Suisse's 1,200 client base and Morgan Stanley's tally of 1,000.
Similarly, a survey last year by Westborough, Mass.-based Tabb Group of 61 head traders at traditional asset management firms placed Goldman Sachs among the top three brokerages in terms of the popularity of their algorithm offerings, claiming 30 percent of the votes, behind Credit Suisse at 55 percent and agency broker Investment Technology Group at 34 percent.
"Goldman Sachs is certainly one of the leaders in the global algorithmic trading market," says Sang Lee, co-founder and managing partner at Boston-based Aite. "While it is tough to pinpoint the exact position of Goldman, it is safe to assume that they are part of the top three bulge-bracket firms, which would also include Credit Suisse and Morgan Stanley."
Backed by considerable--indeed, uncommon--financial resources, the ability to hire and maintain a large and highly qualified workforce for development, market education and other tasks, and the ongoing popularity of its RediPlus direct-market access trading platform, Goldman Sachs Algorithmic Trading (GSAT) was launched in 1998 and externally in 2002. It has grown to a staff of 65, which increased 30 percent over the last year, says Jana Hale, global managing director and co-head of GSAT with Greg Tusar.
Among others on their team are Doug Borden, a U.S. managing director based in New York; Shuya Kekke, head of electronic trading in Asia; and Peter Sheridan, head of algorithmic trading in Europe. Quantitative experts and PhDs add expertise in global market microstructure and financial engineering.
GSAT provides its customers--hedge funds, index funds, program traders and statistical arbitragers, among others--with 11 core algorithmic strategies in the U.S. that allow for a significant level of customization based on various parameters. There are also nine strategies in Asia and 17 in Europe. Globally, the unit facilitates trading in North America, Europe and Asia on over 72 exchange destinations across equities, futures and options markets.
The U.S. strategies have names such as Navigator, an algorithm to help in the selection of the most appropriate strategy based on security and order characteristics as well as the trader's view of short-term alpha; Sonar, which proactively seeks liquidity in displayed and non-displayed pools; Intellishort, designed to take advantage of upticks in the market; Dynamic Scaling, which allows for an increase or decrease in participation rate on a trade based on price changes; and Port-X, a portfolio- or basket-level implementation shortfall algorithm designed to reduce the overall risk of the basket as efficiently as possible. Port-X uses historical and real-time data plus user parameters.
Staying Ahead of the Game
Even with such a broad selection of offerings and strong market position, no firm in this fast-changing and highly competitive market can take a moment's break. GSAT has addressed the challenge in part by focusing on the improvement and optimization of its offerings with what it calls "dynamic optimization."
