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THE TIM Vs. TOPS: SIMILARITIES & DIFFERENCES BETWEEN THE WORLD'S TWO LEADING ALPHA CAPTURE SYSTEMSNEW YORK & LONDON, December 21, 2006 – This backgrounder is intended to help clarify and outline similarities and differences between two of the world's leading alpha capture systems – the Trade Idea Monitor (the TIM) from financial technology provider youDevise Limited, and Trade Optimized Portfolio System (TOPS) from Marshall Wace LLP, one of the largest hedge funds in Europe. All information pertaining to Marshall Wace and TOPS is from previously published articles.youDevise has compiled this information in light of recent interest stemming from news that Marshall Wace has created a publicly traded hedge fund powered by TOPS and a favorable review of alpha capture systems by the UK’s Financial Services Authority (FSA). In December, Marshall Wace, which already had more than $7 billion under management, raised another 1.5 billion euros ($2 billion), in the largest ever initial public offering of a hedge fund, for MW Tops LTD. Proceeds are to be invested in two TOPS strategies that have achieved average annual returns since inception of more than 20%. In September, the FSA commented favorably on alpha capture systems, such as the TIM and TOPS (not mentioning either by name). The FSA noted the growing use of alpha capture systems by sell- and buy-side firms, praising the systems’ clear audit trails, and listing good practices. What Are The TIM and TOPS? The TIM and TOPS are powerful and efficient means for authoring, transmitting and tracking the performance of equity trade ideas that institutional sell-side brokers send to their money manager clients. Prior to the TIM and TOPS, trade ideas were communicated via telephone or email, and money managers tracked them on paper or spreadsheets. What’s the Difference Between The TIM and TOPS? The key difference is that TOPS allows authorized brokers to send ideas only to Marshall Wace. No other buy-side firms can avail themselves of TOPS. Whereas the TIM links to a centralized industry server that enables any authorized broker to send ideas simultaneously to any qualifying buy-side client, providing the client has granted permission to the broker. More than 50 hedge funds, proprietary trading desks and traditional money managers in the US, UK and Japan, are currently using the TIM. What’s an “Alpha Capture System?” Alpha capture is the generic name for technology that systematically captures, monitors, measures and helps to optimize investment idea generation. The objective is to capitalize on these ideas in order to generate absolute returns, i.e., high returns regardless of the performance of any benchmarks. What’s a Trade Idea? Trade ideas are specific long or short stock recommendations typically provided by an institutional broker to a money manager client. Trade ideas describe how much and when to invest, and when to cash out. They are different from traditional analyst research in that trade ideas suggest immediate action and are measurable, whereas traditional research is more theoretical and passive. As a result, trade ideas are emerging as a powerful mechanism for driving performance for active managers, hedge funds and proprietary trading desks. How do the TIM and TOPS Work? On a daily basis, institutional brokers in the UK, US, Europe and Asia send their best long and short trading ideas to Marshall Wace via TOPS and to other clients via the TIM. The ideas are entered into a single web page, accessed through a secure username, password protected Internet site. They require an explanation and a recommendation as to how much to invest, thereby “weighting” the idea. Brokers also notify TOPS and the TIM when they close out an idea. Brokers and their firms can only send ideas if they have been authorized to do so, by Marshall Wace in the case of TOPS, and by the respective buy-side recipient client in the case of the TIM. Both TOPS and the TIM price and time stamp each idea, and have the ability to track, analyze and rank all ideas received. Money managers using the TIM can only view ideas their firm has received; they cannot see ideas directed to other firms. How did the TIM and TOPS Get Started? The TIM started as a means for brokers to measure the value of their own sales and research staffs. TOPS sprang from a debate between Ian Wace and Paul Marshall over the value of trade ideas offered by brokers and whether there was money to be made from them. Who Uses the TIM and TOPS? The TIM currently has more than 2,000 users at approximately 50 buy-side and 70 sell-side firms. The sell-side firms are sending ideas at the rate of approximately 100,000 per year as of December 2006. More than 1,700 brokers from approximately 200 securities firms send in nearly 200,000 ideas per year to TOPS. While Marshall Wace allows brokers to send an unlimited number of ideas, the TIM has an “Idea Control” feature that enables buy-side clients to use a wide variety of parameters to limit the number and type of ideas submitted by each broker or brokerage firm. Why Are TIM and TOPS Becoming Important Now? In addition to increased productivity in the creation and tracking of trade ideas, several business and regulatory forces are coming together to stimulate interest in research and trade ideas, and technology for delivering them to clients. At lot of money is at stake. The annual value of cash equity trade commissions is now estimated to total more than $17 billion worldwide, with approximately $8 billion in the US and a similar amount in the UK. Sell-side and buy-side professionals estimate that research and trade ideas drive about half of this volume, with execution accounting for the balance. For example, Marshall Wace generates a large volume of trading commissions, accounting for 3-4% of all equities traded daily in London and 2-3% of all equities traded daily in Europe. What Other Ways Do the TIM and TOPS Differ? The TIM supports a variety of client types. Long-only managers typically are interested in only “the best of the best” ideas. For example, one TIM client believes that most individual brokers can have no more than six good ideas per year. On the other hand, prop desks and quant funds like to look at all ideas, in order to compare their trading models to other sources of information, since they are interested in patterns and trends, not outright performance. The TIM enables brokerage firms to send both standalone ideas that are authored by individual brokers as well as ideas that are part of a “themed portfolio” that are authored by a team of brokers. The TIM also provides both buy-side recipients and sell-side authors of ideas with similar tools that enable the real time management and analysis of ideas. What Do Others Say About the TIM and TOPS? Both systems are recognized for their ability to capture and create an audit trail of ideas and rigorously analyze ideas based on performance. The core technology behind the TIM has won two major industry awards. In November, the technology won the “Excellence in Compliance and Regulatory Control” award at the 9th annual Institute of Financial Services’ School of Finance/Capgemini Financial Innovation Awards for 2006. In June, the technology won “Innovation of the Year” in The Banker magazine’s annual Technology Awards for 2006. In 2005, Ian Wace was named No. 3 on Financial News 100 most influential people in 2005 in part due to the way TOPS “has transformed the relationships between investment banks and hedge funds.”
youDevise Contacts: youDevise Anreder
About youDevise Limited youDevise Limited (www.youDevise.com), provides on-demand applications for financial markets. The company’s leading applications provide portfolio management for liquid and illiquid assets. They include the Trade Idea Monitor (the TIM), for the high-speed communication of equity trade ideas and portfolio ideas between institutional brokers and their money manager and hedge fund clients, and the Hedge Fund Information Provider (the HIP), the first commercially available portfolio management system for funds of hedge funds. All youDevise’ applications leverage its proprietary Information Distribution Server (IDS), which facilitates the exchange of data between different market participants. |
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