1. Algorithmic Trading and Direct Market Access
Fernando Ripolles, Director
UBS Investment Bank   

2. Introduction
Electronic trading is dominating institutional trading and this trend is set to continue
Compliance, operational risk, real-time updates….
Direct Market Access has become a permanent feature of a buy-side dealer’s toolbox
Already well established in the US and will become more established in Europe
Algorithmic trading is the “new kid on the block”
Quantitative models are extensively used by the sell-side – and not only by the prop desks!
Buy-side dealers on both sides of the pond are steadily increasing usage of broker models

3. Terminology Worked order flow Direct Market Access Algorithmic Trading
Sending electronic orders to your usual sales-trader for manual acceptance.
Traditional trading process similar to telephoned orders.
Direct Market Access
The ability of a buy-side trading desk to route orders directly to an execution venue without intervention by a sell-side trader
The sell-side provides memberships, technology, trade support and credit
Algorithmic Trading
Placing an order of a defined quantity into a quantitative model that automatically generates the timing and size of market orders
Typically constrained to trade to a benchmark, price or time
In-house or vendor provided models or broker provided models
Smart Order Routing
Algorithmic model for managing multiple liquidity sources
Can be applied to both DMA and Algorithmic Trading

4. The business case for technology
For “plain” order routing, FIX enhances the business process and is a complement to the phone.
But for products and services such as….
Direct Market Access
Algorithmic Trading
Efficient Crossing and Internalisation
Smart Order routing
FIX is a prerequisite as these services cannot be accessed or carried out manually!

5. Buy-Side Order Flow by Execution Service 2004
Source: Tower Group, Edhec Risk Advisory

6. Buy-Side Order Flow by Execution Service 2006
Source: Tower Group, Edhec Risk Advisory

7. UBS Dealing conference – Question 3

8. UBS Dealing conference - Question 4

9. E-Orders and E-Turnover 2004 - 2006
Source: UBS
Electronic trading currently represents some 80% of orders and nearly 40% of value in the European Cash Equities business
Four years ago the corresponding numbers were 15% and 5% respectively

10. Electronic Trading by Client Nationality Q4/05
Source: UBS
But, numbers vary significantly from country to country
Regional differences in software suppliers
Regional differences in composition of client base

11. Latest statistics from UBS- February 2006
Up to 80% of all orders in European Equity markets entered the Bank electronically
More than 38% of the value of all orders in European Equity markets enter the Bank electronically
More than ¾ of the Bank’s largest customers trade Equities electronically
The total number of clients connected to the Bank for trading Equities is higher than 2,500 globally
A majority of connected clients subscribe to multiple services e.g. single orders, lists, DMA.

12. UBS Execution Services - Before
Client
UBS Equity Trader
OMS
VENDOR
Orders / Fills / Allocations
FIX engine
Sales Trading
Portfolio Trading
Manual Execution
Risk Teams
Markets

13. UBS Execution Services - After
Client
UBS Equity Trader
OMS
VENDOR
Orders / Fills / Allocations
FIX engine
Direct Execution Services.
DMA/DSA/ DCA
Portfolio Trading
Sales Trading
DMA
Strategy Centre
Manual Execution
Risk Teams
Crossing Engines
Markets

14. UBS Direct Execution Services
Direct Market Access (DMA).
True DMA, Hi performance, Underlying market order types available, customisable client checks.
Direct Strategy Access (DSA).
VWAP / TWAP
Volume Inline
Hidden
Auction
PRISM / Price InLine
Direct Capital Access (DCA).
Pre-agreed liquidity in your selected universe of stocks.

15. Questions to ask of yourself
Investment style?
Goals and benchmark?
Discretion / room for judgement ?
Orderflow profile?
DMA, DSA or/and DCA ?
Remember only 4 ways to trade:
Orders to humans
Orders to market yourself
Orders to a computer / robot
Orders to a book

16. Questions to ask about others
Which providers ?
Relationship / Trust
New or existing
Silo or open
Other services ?
Technology skills
Business skills
Credibility
Direct execution services ?
DMA v DMA
VWAP v VWAP
Pre and post TCA tools
Business process around the technology
Reporting

17. Direct Execution: the connectivity problem
Buy side Order Management Systems
Lack sophistication
Suffer version lag
Broker facing not market facing
Execution management systems
Struggle with buy side backend integration
Don’t get access to all the broker secrets
Broker tools
Contain the broker secrets
Generally access only one broker

18. Direct Execution: what can FIX offer?
The buy-side is increasingly adopting direct market access and algorithmic trading – making the case for co-ordination and standardisation.
Instead of using proprietary interfaces to each broker, apply a standardised FIX format to communicate algorithmic orders!
The human capital behind the algorithm is proprietary, but the format of communication does not have to be secret. Insist on the exchange of ‘Rules of Engagement’ documents amongst buy-sides, vendors and brokers.
The FPL working group is working to ensure that the interface requirements between buy side trading applications and sell side algorithmic servers are covered by the FIX protocol to avoid fragmentation.

19. Direct Execution: how can I go live…
Enhance proprietary OMS to support Algorithmic trading, DMA
There are different ways to achieve this….
Check if you OMS provider has already certified with the broker
Integrate your OMS with a broker tool
Execution services AND functionality
Use a stand alone application
Connectivity going forward
No longer 3 simple models
Hybrid model is likely to prevail

20. Conclusion Robo-trading The Human Factor
Execution services and platforms
Broad range of relevant offerings in the market.
Market facing vs broker facing.
Tighter control of execution process.
Increasing demands on transparency
The Human Factor
Training and skills
Stock, Sector and Market Expertise
Market funnies
Broker services and funnies
Useage plan and creativity
Trading desks must step up to benefit !!

21. Appendices

22. Appendices
DMA
Checklist
Costs and Benefits
DSA
EMS

23. (True) Direct Market Access check list
Direct insertion of the order onto the exchange.
Full control of order by client without broker intervention
High performance / Capacity / Reliability
Breadth ( markets ) / depth ( functionality )
Broker must own the exchange links
Segregated pipes
Safety (Fat finger protection / custom client checks )
Anonymity

24. DMA – Costs and Benefits
Time ~ resourcing
Ownership of Execution risk
Expertise
Infrastructure
Benefits
Speed to market
Price
Anonymity

25. Direct Strategy Access (DSA) check list
Performance
Range of Strategies offered
Business process ( eg Strategy risk managers )
Access to all liquidity within the firm (IXT)
Rocket scientist quotient (brain power)
Market knowledge
Ownership of pipes
Reliability / stability / ease of implementation

26. DSA Costs and Benefits Costs Benefits Applicability of strategy
Intellectual property
Non human execution (Unexpected events)
Benefits
Outsourcing of execution risk
Non human execution (Pub/Sun factor)
Consistency of execution
Price
Impresses the regulator and the boss (Buy side)
Scale (Sell side)

27. Execution Management Systems (EMS)
OMS were typically designed in a world where the broker owned execution process. ( Buys side handed out orders ).
Buy side now require sell side like systems.
EMS = a staging post between the OMS/PMS and broker/market
How ?
Enhancement of the Order Management Systems
Single broker applications
Multibroker applications

28. EMS Check list Range of markets supported Integration with OMS
Parent / Child functionality
Real time market data
Mousetrading – Order manipulation from depth screen
Watch lists and Customisable blotters etc.
Remote trading triggers
Men on motorbikes and Training courses

29. Contact details Fernando Ripolles Direct Execution Services
UBS Investment Bank, 1 Finsbury Avenue
London, EC2M 2PP