Program traders look to algorithms in 2005

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With an ever increasing proportion of trades executed electronically, 2004 was another good year for program traders and bonuses have been up on both sides of the Atlantic. But the outlook for 2005 is less assured.

Program trading, or 'portfolio trading,' refers to a number of trades triggered and implemented automatically, once parameters have been set by IT teams. The New York Stock Exchange (NYSE) defines program trades as involving more than 15 stocks with a combined value of over $1 million. Greenwich Associates, a research company, says the proportion of trades executed electronically on the NYSE rose to 50% in 2004, up from 44% in 2003.

Recruitment has risen accordingly. Merrill Lynch, Dresdner Kleinwort Wasserstein (DrKW), Citigroup, JP Morgan and UBS all hired in the program trading space, while banks such as HSBC and HypoVereinsbank built new teams.

However, program trading is being bundled together with other alternative trading methods, including direct market access (providing systems that allow fund managers to send orders directly to execution without the intervention of a trader), and algorithmic trading (trading which uses algorithms programmed on computers to process orders far faster than any human being). Redundancies could result.

City of London: strategic hiring

Paul Tapp, a headhunter specializing in program trading in London, says banks will make strategic hires for program trading in 2005 but that bonuses for 2004 will depend on which business areas program trading desks fall under. For example, at DrKW, program trading is part of the equity derivatives business, while at Deutsche Bank it is part of cash equities.

Since cash equities divisions had a relatively bad year in 2004, program traders on cash teams are likely to be paid poorly. But program traders on equity derivatives teams should do well. Figures from the Bank for International Settlements suggest the total value of contracts outstanding in over-the-counter (OTC) equity linked derivatives rose almost 20% during the first half of the year alone.

Tapp forecasts London bonuses should grow an average of 10% for junior staff in program trading. Senior top performers can expect rises of 20% or more. Taking the increases into account, he says associates can expect a base salary of 80,000 (€115,000) maximum, plus a maximum 110,000 bonus. Vice presidents (VPs) can expect maximum base of 150,000 plus a 220,000 bonus and directors can expect maximum base of 120,000 plus bonuses up to 960,000.

Wall Street: Programming trading bonuses up 15%

David Korn, managing partner at the Options Group and a specialist in program trading recruitment, says bonuses for traders and salespeople in the area should rise 15% in 2004.

In a survey of over a hundred candidates and recruiters, the Options Group found 2004 base salaries and bonuses for associate salespeople and traders in program trading on Wall Street should reach $75,000 and $100,000 respectively. VPs should receive base salaries up to $125,000 and bonuses up to $900,000, and managing directors should receive maximum base of $250,000 and maximum bonuses of $1 million plus.

Algorithmic trading: growing, growing, grown

Both Tapp and Korn point to a trend for program trading to be bundled with other services. Korn says this could lead to redundancies. 'Where previously there were three people selling program trading, direct market access and algorithms, there will now only be one selling all those products.'

Within the combined groups, program trading is unlikely to be the hottest growth area. That honour is reserved for algorithmic trading. Dushyant Shahrawat, a consultant at TowerGroup, a U.S. market research firm, says algorithms accounted for about 7% of buyside trades in the U.S. last year. TowerGroup forecasts this will rise to 21% by 2006. Europe has even greater growth potential. Shahrawat says only 3% of buyside trades on the continent used algorithms in 2004.

As a result, algorithmic trading is likely to prove a hiring hotspot. Shahrawat says program trading teams are well equipped by comparison.

Richard Evans, head of the alternative execution desk at Citigroup in London, which has already combined its program trading, algorithmic trading and connectivity functions in a single group, says algorithms are creating demand for a new breed of trader.

'Houses are hiring very quant-based traders who can analyze a huge number of trades and build algorithms that can trade them as well as any human being,' Evans says.

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