Raymond James is building out an electronic equity trading business and is rolling out new algorithms so clients have another means to pay for research. The firm has also added several new sales traders to its desk to further complement its electronic tools.
This is the second phase of its two-pronged approach to make the longtime high-touch shop a favored execution partner. The first phase was establishing a commission management business about a year ago. This follows the firm’s recent acquisition of broker-dealer Morgan Keegan.
The addition of the electronic desk and white-labeling algos won’t affect Raymond James’ traditional high-touch trading focus, according to Dan McMahon, director of institutional equity trading at Raymond James. But it does provide the buyside with an alternate means of paying their research chits.
"We are, and will remain, a high-touch shop, but expanding into the electronic space is complementary, particularly in light of our growing commission management business," McMahon said. "In order to maintain relevance in this market and not be cut off from a significant portion of the commission pool, electronic trading capability is a requisite, and will be another arrow in our quiver."
One desk head agreed, "Any real institutional brokerage needs to have an electronic offering, which is something the firm didn’t have."
Raymond James completed a $1.2 billion merger with Morgan Keegan on April 2.
McMahon described the transition of Morgan Keegan traders into the Raymond James culture as "seamless." He declined to say how many traders joined from the firm, citing compliance issues.
"They were at Morgan Keegan on a Friday and reported Monday to us. It wasn’t terribly different from adding a new recruit – it was effectively plug and play."
The build out of Raymond James’ New York-based electronic trading desk follows last year’s startup of the company’s commission management group, according to Doug Leo, the firm’s head of commission management and electronic trading in New York. The commission management business was the first step in offering a complete electronic trading platform.
Commission management services are good for the buyside—and the executing broker.
The service allows a buysider to pay research bills to various providers through an executing broker, such as Raymond James. This leeway to pay bills gives the buyside the ability to better manage its research relationships, while trading with a preferred broker.
"Now that the commission management business is starting to grow, we can focus on the electronic desk," Leo said. "Any statistic will tell you that 50 percent of all commissions are paid in the electronic space, so we had to have one. The electronic desk couples nicely with our commission management business."
He added the firm has added "a number" of new accounts since the commission management business’ inception. With that business established, the time was ripe to add algorithms and hire new sales traders.
The firm will be "white-labeling" algos from multiple providers to offer to its clients. This would give clients a second way to pay for research away from executing high-touch trades. With so many vendors to choose from, and the high cost of developing algorithms internally, Leo said the choice to outsource made sense. Raymond James will offer a full suite of single-stock algos, as well as pairs and program-trading algorithms.
"We have selected best of breed providers, but will rotate them based on performance," Leo said. Also, if a client wants to use his own favorite algo from another provider, Raymond James will help incorporate that algo into its system.
Leo also told Traders Magazine that the firm plans to white-label and offer clients an order management system for clients who do not have one. The firm is also looking into expanding its trading into non-U.S. equities and options.
On the desk, Raymond James has added four traders in New York: Michael Young, Jeff Melvin, Kenneth Bollinger and Paul Cornette. Both Young and Melvin join from Morgan Keegan.
Young, a four-year veteran, spent the last two years trading and the previous two in research sales. Melvin, an 11-year pro, previously traded the technology, media and telecom sectors. Bollinger, an 18-year veteran, joins from Oppenheimer & Co., where he spent his entire career, trading mostly technology stocks. All three position traders report to Dan McMahon, director of equity trading.
Sales trader Cornette, a former buysider with 19 years’ experience, will cover asset managers across North America. He comes from Cowen & Co. He reports to Paul Powers.
The firm’s sales traders are spread across Boston, St. Petersburg, Los Angeles, London and New York. Its principal traders are all based in New York. Raymond James also has market makers and sales traders in Chicago dedicated to the financial services sector, a result of the Howe Barnes Hoefer and Arnett acquisition in April 2011.
The desk looks to leverage the firm’s research— which covers predominately the small- and mid-cap space and consists of approximately 55 senior analysts who cover nearly 1,000 U.S. companies across eight industry sectors, weighted toward those with a market cap of less than $5 billion.
"We’re a research driven investment bank which offers the necessary breadth for comprehensive coverage, while still delivering a deep focus within each sector," McMahon said. "When clients seek liquidity in our names, they are confident we know where the bodies are buried, and can be trusted to make intelligent calls."
