They are sent to and used by hedge funds and proprietary trading desks, as well as traditional money managers.
Currently, more than 4,000 market participants at 80 sell- and 70 buy- side firms are employing trade ideas to drive their business, according to financial services technology firm youDevise Limited. As of February 2007, approximately 3,300 sell-side professionals are using youDevise's Trade Idea Monitor (the TIM) to author and transmit ideas to more than 670 recipients, who are using it to track these ideas and decide which trades to execute. In turn, recipient firms are allocating up to 80% of their commission spending to sell-side firms that send them ideas.
Anti-spam features enable recipients to control which brokerage firms send them ideas. About 12 months ago, when the TIM was first made generally available, there were just a few hundred users at four firms in the US and UK.
Colin Berthoud, Director of youDevise, said the growing use of trade ideas is being driven by regulatory clarity on "soft dollar" or research commission spending; new technologies, known generically as "alpha capture systems," for composing, sending and evaluating ideas; sell-side strategies for growing commissions in the face of algorithmic systems that are driving them down; and the publicly known success of money managers that use trade ideas. Hedge fund Marshall Wace, for example, raised 1.5 billion euros ($2 billion) in a December IPO on the strength of two trade idea strategies that have achieved average annual returns since inception of more than 20%.
The TIM helps the sell-side develop and transmit ideas in a structured format so that recipients can store the ideas and use a series of analytical tools and integrated features to identify the best performing ideas and the brokers who authored them. According to the latest activity reports:
* 65% of users are based in Europe, with the balance in the US and
Asia representing the fastest growing markets.
* Recipient firms are split evenly between prop trading desks,
hedge funds and traditional asset managers. Recipients include two of the top prop trading firms and three of the top hedge funds in the US and UK, and four of the largest traditional asset managers in the world, each interested in a premium service for tracking and managing trade ideas. At these firms, about 25% of recipients are traders, 25% are portfolio managers and 50% are buy-side research analysts.
* Among idea authors, approximately 70% are sales people, 15%
sales traders, and the rest are research analysts. The sell-side firms for whom they work include more than 15 of the top "bulge bracket"
institutional brokerage and research firms in the world.
* The majority of ideas transmitted involve US and European based
equities, but interest in emerging market stocks is increasing rapidly.
To accommodate this trend, the TIM was recently enhanced to show exposure to a stock's currency, as well as the price of the stock, and allow users to see whether currency movement or price movement most affects performance.
To facilitate expanded use, youDevise has tripled the TIM's server capacity over the last six months. The TIM now takes advantage of multiple replicated databases, a key technological development needed to service a large number of users accessing the TIM's databases at the same time. London-headquartered youDevise also plans to open an office in New York City this year.