Labels and stereotypes, as narrow minded and misused as they often are, are sometimes unavoidable. Off Wall Street, traders are often put in a box — brash, cigar chomping, fancy-watch wearing gamblers.
But it turns out, within the money management community, trader and portfolio manager stereotypes are now being embraced, thanks to agency-only brokerage Abel/Noser.
The New York-based firm, which invented the Volume Weighted Average Price (VWAP) execution benchmark used in many an algorithm, has amassed over two decades worth of buy side institutional transactions totaling $7.5 trillion in principal.
Tapping the data to spot patterns in much the way that a golf pro might videotape a student’s swing to be able to offer specific instructions, Abel/Noser has been classifying portfolio managers and traders over the past six months into a number of profiles. The profiles will reflect categories that speak to repeated tendencies, said Peter Weiler, the firm’s head of global sales.
“Once we identify the profile of the portfolio manager, his strengths and weaknesses, we can then build customized algorithms around those behavioral patterns,” Weiler explained.
The use of mathematical equations to optimize and automate block trades is nothing new. But Abel/Noser’s stereotypes are not only interesting, they’re a testament to the rising importance of buy side traders and their skill sets — and to the need for traders and PMs to work more closely together. Up until a few years ago, a buy side execution trader was viewed by some in the industry as mere order filler for PMs.
So now, buy side traders and PMs must be asking themselves one question: what box do I belong in?
No. 1
The Momentum Chaser
This type lives each session on the upslope and might even feel at times as if they can bully a stock higher, or better yet, piggy back on some other bully, especially in low volume markets where, in an era of algorithmic trading, the individual idiosyncrasies and proclivities of a buy side trader most come into play.
No. 2
The Countertrender
More comfortable on the downslope, this type of trader is more than happy to pick up unwanted shares of those who are in full dumping mode, but doing so slowly and methodically.
No. 3
Mr. Neutrality
Trading’s Switzerland, the neutral trader prefers to flatline, agnostic to but not completely ignorant of news, gossip and trends. If the market is flat and uneventful, this trader is right at home.
No. 4
Smiley
Within the rubric of basic charting, Abel/Noser depicts these top notch buy side traders with a half circle smile, guys who time trades perfectly, riding an unloved stock down and who hang around long enough to ride them back up. They are probably the few and far between of the stereotypes. Over time their ability to “smile” could add several percentage points to returns.
No. 5
Frowner
As in the opposite of the smiley face guys. Late to the party top tickers, at times saboteurs of a PM’s best ideas, these types are not long for the profession, so best hope you do not fall into this category.
Generally speaking, a PM’s particular style might impact a trader’s behavioral patterns. A smiley is a value fund manager’s best friend, while a momentum chaser would be more likely to be bred at a growth shop.
So while it may seem most traders would want to be seen as smileys, being that guy may not fit their fund’s way of doing things. In the case of mutual funds, they might have to put capital to work by mandate from inflows, or in the case of certain hedge funds, they’re all about momentum and “edge.” And of course there’s something to be said for those traders who refuse to be boxed in or who freely mix styles as the market dictates. Not everyone can be summarized in any single algorithm or stereotype, but then you can be sure Abel/Noser is working on that.
Rich Blake is a New York City-based freelance financial journalist. He currently contributes to Institutional Investor magazine, Reuters HedgeWorld and ABCNews.com, among others.
