Algorithmic provider Pragma Financial Systems is ramping up its ambitions and execution services with the help of longtime partner Weeden & Co., which substantially increased its stake in the firm earlier this year. Doug Rivelli, the new CEO of Pragma Securities, the firm’s broker-dealer, will help oversee the expansion of the firm’s trading and algorithmic products to both the buyside and sellside.
Rivelli, who ran Weeden’s electronic trading desk, joined Pragma in January. Weeden enabled him to move the firm’s electronic trading group to Pragma. David Mechner, who co-founded Pragma in 2003, remains president and CEO of Pragma Financial Systems and will run the algorithmic development business. Co-founder Lee Maclin continues to have an advisory role at the company.
“I believe Pragma is one of the leading providers of algo products to the Street, and the opportunity to do it right is extraordinarily enticing,” Rivelli said. As part of this transition, Weeden, which has had a partnership relationship with Pragma for four years and distributed Pragma’s algorithmic platform to buyside firms, became a significant investor in the company. Rivelli and Mechner declined to say how much of Pragma is now owned by Weeden.
Barry Small, CEO of Weeden & Co., will also serve as chairman of Pragma’s board. “I’m very excited at this time to help blend the talents of Pragma and Weeden to serve institutional clients in the electronic trading space,” he said.
Pragma’s focus will remain on electronic and algorithmic trading products. About half of its almost 50 employees are in algo development, according to Mechner, and the firm is hiring more quants and researchers. This staffing makes Pragma one of the largest algo development groups on Wall Street, Mechner said.
Pragma Securities is currently a non-executing broker-dealer. That will change sometime in the second quarter when it begins to function as an executing broker. The company is also gearing up to offer a broader range of execution services.
In May, Mechner said, Pragma will release an upgraded suite of algos to its customers. Pragma Securities will roll out a dark pool in the third quarter. Later this year, the firm will also add a suite of international trading products. Pragma currently has about a dozen people in execution sales and support, and plans to hire another half-dozen this year, according to Rivelli.
Rivelli and six colleagues who constituted Weeden’s algorithmic business joined Pragma on Jan. 1, with Weeden’s approval. “The idea was that having an independent company dedicated solely to the development of high-quality algorithmic products was in Weeden’s best interest, and in the best interest of Weeden’s clients,” Rivelli said.
David Margulies, who ran algo sales at Weeden, is responsible for sales at Pragma. Pragma in March also brought Curtis Pfeiffer on board from Bank of America as director of business development. He had been head of electronic trading sales at BofA.
Pragma’s OnePipe product, which aggregates dark pools, will continue to be distributed exclusively by Weeden, although Pragma’s other products will be available through Pragma to both buyside and sellside clients. These include TradeEngine, the algorithmic software distributed to buyside firms that integrates with the client’s front end, as well as PEAK, the algorithmic product for broker-dealers.
Pragma’s business has grown rapidly in recent years and its revenues doubled over the last year, Mechner said. About 70 percent of Pragma’s business comes from buyside firms. Although some buyside clients have licensed Pragma’s algos for use internally, the vast majority of institutions are currently Weeden clients. Buyside clients include traditional mutual fund companies, long-short funds and hedge funds.
The firm can now service a broad range of institutional clients. “Weeden is our main execution partner for buyside clients,” Mechner said. “However, we’ll now have the option to offer our products to additional buyside clients directly.” Rivelli adds that some clients may prefer to trade with a broker-dealer that engages only in electronic trading, “so we’ll supply that option.”
The Pragma executives say their company is focused on bridging the gap between clients and developers. The firm, for instance, brings developers and quants to meetings with traders and portfolio managers. “That’s the best way to develop products that are customized to what the client wants,” Mechner said.
The company also plans to pursue broker-dealers aggressively. In Pragma’s view, the time is ripe to expand its algorithmic offering to sellside clients. With capital commitment down, the disappearance of IPOs and the value of research being questioned, the door is open for medium-size and smaller broker-dealers to gain some of the business that automatically went to bulge-bracket firms, Rivelli said. Pragma can help those firms build up algorithmic trading businesses without a lot of investment.
Pragma’s PEAK product is a “complete turnkey solution” that costs less than those of its competitors, Mechner said. Pragma currently has more than two-dozen broker-dealer customers but is counting on increasing that number. Brokers pay a per-share fee for Pragma’s algorithms.
“We invest a lot of resources in our current products and are growing new products at a time when a lot of our competitors are not,” Rivelli said. “Mid-size broker-dealers that could be the beneficiaries of changes in the marketplace can look to us to provide them with tools to operate their desks efficiently.”
Mechner agreed that the cost of developing and maintaining a full-scale algorithmic offering is high, especially in the current environment, which has put pressure on brokers to control costs. “We’ve invested in R&D and built this infrastructure,” he said. “Since we have multiple clients, we can make these investments and amortize them over many parties.” He added that more firms are getting comfortable with outsourcing some of their trading functions.
Rivelli added that Pragma also allows broker-dealers to execute under their own MPID, which some brokers value. Those that want Pragma to be their passive executing broker or want to mask the orders they send into the market can use Pragma’s MPID once the broker-dealer is able to execute orders.
