Merrill Lynch to offer algorithmic engine to buy-side

Merrill Lynch is slated to join a growing array of major sell-side firms that will allow third-party access to their algorithmic trading engines.

To provide links to its ML X-ACT algorithmic trading service, Merrill Lynch is partnering with vendor Portware, which will provide the Merrill Lynch link as a standard option for its Portware Professional trade management system.

The new access will appeal to quantitative asset managers, fund managers as well as new and established hedge funds. Goldman Sachs and Credit Suisse First Boston (CSFB) have also signed on with Portware to offer the buy side new access to their algorithmic engines.

Not all major firms have gone public with their third-party access to algorithmic engines, said Ary Khatchikian, president and chief technology officer of Portware. "We support a lot more than three venues."

Officials at Portware said they provide algorithmic access to approximately 10 major firms.

The agreement with Portware is an acknowledgment of what the firm has been able to do for a while, says Mike Stewart, a managing director and head of global portfolio and automated trading at Merrill Lynch. The firm provided FIX connectivity to ML X-ACT for internal groups via third-party order management systems and directly to clients that have established their own FIX connectivity, Stewart said.

Launched in the third quarter of 2003, ML X-ACT is a high-level algorithmic engine that exploits real-time and historical market data feeds. The engine has had continual updates since then. "We think of algorithmic trading as another sector. It's really an evolution of a trading effort that's always been there," Stewart said.

High profile moves by Merrill Lynch and others will improve the appeal of algorithmic trading, according to analysts at market researcher TowerGroup. Evolving financial markets and enthusiasm for electronic trading are also making algorithmic trading more attractive, according to a new TowerGroup report.

"Fragmentation of liquidity and lower commission price points are driving the buy side towards the use of algorithms, while institutional brokers are looking to the same new tools to lower their trading costs to support those reduced commissions," says Gavin Little-Gill, a TowerGroup analyst, in a prepared statement.