The Gateway to Algorithmic and Automated Trading

Now what?

Published in Automated Trader Magazine Issue 16 Q1 2010

If you’re stuck for an idea, buy one. Simon Tizard is Executive Director of Trade Ideas Limited (TIL), where the product is exactly as specified on the corporate letterhead. Automated Trader editor William Essex went to find out how well the ideas business has been coping in these troubled times.

Now what?

William Essex: To start at the very beginning, it seems counter-intuitive to commoditise ideas and sell them. How did the company start and how does it work?

Simon Tizard: It's important to say right at the start that trade ideas are not commoditised; the opposite in fact. They are specific proposed trades for a client, or small number of clients, based on the provider's detailed knowledge of those clients' interests, size of fund and mandate. Trade ideas are therefore customised not commoditised. Remember also, trade ideas are not spam and a broker and its client both have to agree to send and receive the trade ideas.

William Essex: And you? Tell us a bit about your background.

Simon Tizard: My background is in financial technology. I started with the London Stock Exchange in the lead up to Big Bang and then worked for a number of software and services vendors, serving both buy and sell side customers. In the last few years I have worked on both the BOAT and Turquoise projects so have good experience of working with consortia of investment banks, which is very relevant to my role with TIL.

William Essex: I suppose I'm coming at this from the notion that an idea is something to keep to oneself. Is that naive? If it's not an unfair question, what's the value of a second hand idea?

Simon Tizard: The broker is there to serve its clients. The ideas are not second hand as they are developed for the specific client and its needs and interests. Clients pay the brokers on the success and performance of their trade ideas. This is crucial. Alpha capture is a premium, performance based service. Brokers' ideas have value and they therefore only provide them to their most valued clients. If the ideas do not outperform then the clients won't pay the broker.

William Essex: How big is the market for trade ideas? Is it growing?

Simon Tizard: The global market for trade ideas has grown consistently since 2003. There are currently at least 250 brokers globally that are seriously involved in producing trade ideas. Usage originally developed in the UK and Europe, but has begun to really take off in North America and the Far East in the last two years. There is no reason to suppose this growth will slow as, to date, ideas have been largely equity oriented, but now we are seeing interest in fixed income and commodities.

William Essex: What does a trade idea look like? Is it just "Sell X!" for example, or "Sell X because ...", or does it vary? Is there a secondary market in the analysis behind trade ideas?

Simon Tizard: A trade idea takes the form of a structured, formal message containing for example: stock, currency, long / short position, suggested trade size, timeframe and target price. Ideas normally also have a detailed analysis and commentary providing the rationale behind the proposed trade and may also include links to other material.

I think that the market for software tools for analysis of trade ideas will be a very interesting area going forward. Already some vendors are offering analysis of broker sentiment based on the trade ideas going through their systems. As far as TIL and the brokers are concerned the individual ideas are the brokers' intellectual property and it is very unlikely that they would be prepared to widely publish their idea history database.

Major brokers are working with certain clients that are looking to develop innovative trading programs and may provide them with idea history for detailed analysis and modelling. This history has particular value to quant based managers who can undertake detailed assessment and backtesting on the underlying data.

As far as TIL is concerned our position is that individual ideas belong to the brokers and their IP is sacrosanct. However, TIL has discussed some interesting opportunities in the areas around publishing aggregated data, but we would only do so if this is supported by brokers.

Simon Tizard

Simon Tizard

William Essex: Who uses trade ideas, and how?

Simon Tizard: Ideas are used in different ways by different funds. Some buyside firms follow a quant approach and transact on the back of this unique data. Other firms may use the ideas as part of their overall evaluation of a stock or sector using it alongside in-house research, broker research and their analytical models. They may trade the idea but not for days or even weeks later.

William Essex: How narrowly do buyers define the ideas that interest them?

Simon Tizard: The buyside are generally pretty specific about the type of ideas they want to see. Ideas are sent to individual managers or teams, rather than the house as a whole so salesmen tailor the ideas in relation to: market, sector, size etc. Buyside recipients often define the rules on which ideas are to be sent including; investment size limit, total paper portfolio limits, implied transaction costs, etc. Even the number of ideas that they want to receive in a given period. For example; "Only send me your best two ideas a month".

William Essex: Do they use ideas to trade, or to generate their own further ideas? Are ideas traded, or used as an indicator of what's being traded?

Simon Tizard: In many cases "yes" to the all of the above. No two clients use the ideas in the same way. Funds do not generally tell their brokers if they have traded an idea that they have received from them. They want to maintain confidentiality in the market as to any position that they may have taken.

William Essex: Is there a 'typical' consumer of trade ideas? How would you 'pitch' trade ideas to a prospective new buyer?

Simon Tizard: I don't think that there is a typical idea consumer. Organisations receiving ideas range from specialist quant funds, hedge funds to traditional long only managers.

Brokers can "pitch" their services on the basis of the past performance of the ideas they have developed, however I don't think there is an issue for leading brokers in particular needing to pitch to clients. Different types of funds think differently about the ideas they receive. Long only fund managers are stock pickers looking to trade a stock that will outperform. If they like the idea they may trade it, irrespective of the source. Quant managers on the other hand are trading on the basis of who the idea author is. The stock is not so relevant and the key is who has sent the idea and the consistency of their performance.

William Essex: Is there a benchmarking process for trade ideas, or is that left to the consumer? I guess there's value in a source that is consistently wrong?

Simon Tizard: Both brokers and their clients avidly monitor and measure the performance of the ideas. Brokers are looking to generate alpha for their clients and want to be able to demonstrate that their ideas are outperforming the sector or market. Clients are looking for signals; a salesman whose ideas' performance is consistent is a valuable indicator for them.

William Essex: What can trade ideas tell us about the state of markets in general, or indeed about the participants in those markets? Do you get a sense of a mood?

Simon Tizard: The number of long ideas
outweighs the number of short ideas. Whilst the ratio of buys to sells fluctuates to an extent and thus is some form of sentiment indicator, brokers' ideas are usually long.

William Essex: Are traders optimistic? What is the mood?

Simon Tizard: I'm not able to tell you that, but some alpha capture system suppliers do provide this type of analysis for example providing market sentiment scores based on the long / short ideas in their system.

William Essex: What does that tell us about the current recovery? To put the question rather clumsily, if today's flow of ideas was traded in its entirety tomorrow, how would the world have changed by tomorrow evening?

Simon Tizard: I believe that idea sentiment is currently broadly positive. One would hope that this is correct and that the recovery in the markets and the global economy continues.

William Essex: Is there scope for an index based on trade ideas? Would that find a market, and could it become a tradable index?

Simon Tizard: An interesting thought but I suspect it would be very difficult to implement a tradable index and calculate it with any statistical validity.

William Essex: You're feeding trade ideas into a very competitive environment. To what extent does trading the right idea deliver a competitive advantage, or given the general focus on latency, should we talk about being first to trade the right idea?

Simon Tizard: Latency is an important issue and TIL's aim is to help all idea recipients, irrespective of the system they use to get ideas at the same time. Fund managers do not then necessarily automatically trade an idea the instant it arrives. As a manager you may evaluate the idea for a while and then decide to take a trade, or not.

William Essex: I don't know if I can ask this as a serious question, but just hypothetically, do you ever find yourself on both sides of a trade? You sold 'sell' to one party and 'buy' to the other?

Simon Tizard: No, a provider would not be issuing buy and sell ideas on the same stock to different clients at the same time.

William Essex: What would you guess is your "market share" of all the ideas that get traded over any given time period?

Simon Tizard: Market share is not really relevant to TIL. Our aim is to facilitate the simple exchange of ideas between the sell and buy side, by providing a vendor neutral platform. The measure of success for us is how many vendors, or firms with their own systems, are connected to us.

William Essex: Are there "stars" in the field of generating trade ideas?

Simon Tizard: Yes there are "stars" within the brokers. Firms analyse the performance of the ideas that are published and carefully assess which of their sales people are the most successful.

William Essex: Thank you.

A history of ideas

Trade Ideas Limited (TIL) was originally created by a group of investment banks as a result of the growth of interest in alpha capture and of related proprietary systems. Approximately 5 years ago, alpha capture was beginning to come to the fore and a number of fund managers (notably Marshall Wace with its TOPS system) and also software vendors had developed systems into which brokers could enter and distribute their trade ideas.

The concern the banks had was that they would end up with their sales people having to have a whole range of different systems on their desks just to enter ideas into. This is highly inefficient and can also raise compliance issues so the TIL founders decided that it would be beneficial to develop a hub to which ideas could be sent by brokers (ideally from just one system) and from which the buy side could retrieve them, irrespective of whichever system the parties used. The brokers also wanted to ensure that they maintained control over who ideas were sent to.

MBA Systems is the key IT supplier in the trade ideas space. The company offers a range of products that automate the broking process, including order capture, routing, trade management, execution and the distribution of client information. MBA's product range includes: Clients Direct, Internet Broker, Speedreport and TransFIX.