“Regulatory changes are forcing the banks to shrink, so with banks not wanting to take principal risk they’re leveraging their infrastructure to try to support new entrants into the market as well as hedge-fund spinoffs,” Tabb said by phone. “That way they can continue to keep the flow, generate fee- based income and reduce their proprietary trading risk.”
There were 9,700 hedge funds and funds-of-funds in the second quarter, more than in any year except 2007 when the total exceeded 10,000, according to data from Hedge Fund Research Inc. The number of hedge funds rose to a record 7,768 in the second quarter, the Chicago-based firm said in an Aug. 7 report.
Clients of the UBS group can choose among four tiers of execution services, ranging from low latency to ultra-low latency, Stickler said, referring to offerings that enable customers to send orders to exchanges or other venues with minimal delay. Risk filters and checks that became mandatory for orders sent to markets last year take a maximum of 60 microseconds, or millionths of a second, he said. Clients’ orders can go through that process faster if speed is critical to their strategies.
Building the technology infrastructure and systems needed to implement trading strategies can be “prohibitively costly” and too time-consuming for many funds, Anthony Dostellio, managing partner at Objective Paradigm, a technology recruiting firm in Chicago, said in a telephone interview.
Most firms that don’t compete exclusively on speed are likely to adopt a “blended environment,” where they build some of the technology themselves and purchase the rest from vendors and brokers, Dostellio said. Reliance on services from banks may grow as existing firms expand into new regions or asset classes, he said.
--Editors: Chris Nagi, Michael P. Regan