Technology: Outfitting of the Trading Desk

Moderated by: Andy Luro Venture FSG

Agenda Agenda TopicsTopics

Panelist Introductions

What Venture FSG is Hearing

Panelist Presentations

Questions and Answers

PanelistsPanelists

Andy Sommers, Senior Vice President, Investment Trading

Systems Putnam Investments

Rick Enfield CPA Director of Product Management Charles River Development

Mark Clark Executive Vice President Direct Market Access SunGard/BRASS

What Venture is HearingWhat Venture is Hearing

Connectivity

Intelligent Trade Automation

Algorithmic Trading

Trade Regulations

Integration

Market Data Access

The Trading Function Changes and Challenges

Presented by: Andrew Sommers Putnam Investments

AgendaAgenda TopicTopic

Equity Trading – The Mature Environment

Fixed Income Trading – The Opportunities

Equity Equity TradingTrading

Maturity in Order Generation and Management

Robust Electronic Communications

Measuring the Effectiveness of Implementations

Fixed Income Fixed Income TradingTrading

Improving Electronic Communications

Increasing Use of Derivative Instruments

Increasing Demand on Compliance, Reporting, and Risk Analysis

Compliance & Regulations: Technology Impact on the Trading Process

Presented by: Rick Enfield Charles River Systems Inc.

Agenda Agenda TopicTopic

Equity

Fixed Income

Derivatives

Foreign Exchange

Equity Equity TradingTrading

Automated Routing and Algorithms

Ultra High Volume Executions

Impact of Wealth Management

Fixed Fixed IncomeIncome

ATS Processing and Origination of the Order

Generic Security Processing

Post Execution Allocations

Data Management and Consistency

DerivativesDerivatives

Measuring Exposure / Look-through

Growth of Credit Default Swaps

Intraday Valuation

Foreign ExchangeForeign Exchange

Local Cash Overdrafts

Currency Swaps vs. Overlay Management

Intraday Exposure Management

Counterparty Exposure Management

Changes in Trading Technology: A Sell-Side Perspective

Presented by: Mark Clark SunGard / BRASS

Changes in Trading Technology: A Sell-Side Changes in Trading Technology: A Sell-Side PerspectivePerspective

Structural Shifts in the Business of Trading

Corresponding Movements in Trading Technology

Closer LooksDirect Market AccessAlgorithmic TradingTCA/Trading Analytics

Open Questions/Areas to Watch

Structural shifts in trading: client-driven Structural shifts in trading: client-driven changeschanges

‘96 ‘98 ‘00 ‘02

1. INFO/ACCESS: Broker-Dealers lose information/market access advantages

4

8

12

16 TradeReports

Quote Updates

Insides(Level1)

NASDAQ: Average Messages Sent per Day [Millions]

3. CLIENT MIX: Hedge Funds/

Quants become important clients

0

200

400

600

800

Passive

Quant

Active

'00

Hedge Passive

Quant

Active

Hedge

'03

US Buy-Side Trading Vol.[Billions of Shares]

2. FEES: Clients demand and get

reduction in commissions

chart

-15%

-10%

-5%

0%

’95-’00 '00-’04

Annual Change in Per Share Brokerage Commissions [%]

-6%

-14%

Source: Mercer Oliver Wyman Analysis, Morgan Stanley Research, NASDAQ; NYSE; SIA; SunGard Analysis

4. TRADING MIX: Clients drive algorithms,

program trading

chart

0%

20%

40%

NYSE Program Trading Volume Percentage

'00 '04

10%

30%

22%

48%

Structural Shifts in TradingStructural Shifts in Trading

Areas of Pressure and Change

• Regulation NMS

• Combinations and Evolving Market Micro-Structure

(e.g., NYSE / ARCA)

• SEC and SRO Enforcement

• Sarbanes Oxley

Auditing8%

Legal10%

IT15%

Staffing12%

Training55%

Estimated Total Compliance Costs: US $5 billion p.a.

… and increasing

Source: Deloitte – 2003 Global Securities Industry Outlook)

Pressures from evolving market structure and regulation

The Results: Movements in Trading The Results: Movements in Trading TechnologyTechnology

Automated and Rules-

Based Trading

Electronic Client

Relationships

New Equities Trading Models

Global Markets/

Other Asset Classes

Alternative Execution

Points

TCA/ Trading Analytics

Algorithms and

Conditional Trading

Compliance Handling –

At- and Post-Trade

Unified OTC/Listed

Trading

Smart Order Placement

Sponsored Direct Market Access

Client Connectivity “Hubs”

A Closer Look: Direct Market AccessA Closer Look: Direct Market Access

What Is It? • Broker-sponsored direct-to-market, broker, and algorithmic routing

• Tailored, “smart” execution tools; Staging or direct integration (FIX)

• Administrative, reporting and risk tools for the Sponsor

Why Is It Important? • Increased trading control / reduced information leakage

• Lower commission and administrative costs

What Comes Next? • Smart order placement and trade-through compliance

• Increased execution points, e.g., block systems, new markets/ECNs/ATSs

• OTC/Listed, cross-asset, and cross-market access

A Closer Look: Algorithmic TradingA Closer Look: Algorithmic Trading

What Is It? • Automated block/strategy trading; managed historically by traders

• Increasingly focused on analysis and identification of opportunities

Why Is It Important? • Lower commissions

• Efficiency from electronic order entry and low(?) maintenance

• Better execution quality - if strategies are used and monitored correctly

What Comes Next? • Commodity “white labeled” algorithms

• Implementation outside of equities

• Strategy selection support and benchmarks/analytics

A Closer Look: TCA/Trading AnalyticsA Closer Look: TCA/Trading Analytics

What Is It?:• Post-trade transaction cost analysis tools

• Standard and customized reports and benchmarks

Why Is It Important? • Demonstrates compliance and value

• Facilitates trading improvement

What Comes Next?• Pre-packaged reports, benchmarks, and standards

• Better accounting for new trading types, e.g., algorithms and programs

• Integrated pre-trade and at-trade tools; OMS and DMA links

Open Questions/Areas to WatchOpen Questions/Areas to Watch

Exchange Market Structure

Market Data – More of It

Regulation NMS Interpretations:Exemptions, e.g., Block TradingOrder Placement

Compliance

New Entrants

What Venture is HearingWhat Venture is Hearing

Questions & Answers