Have algo BlackBox, will travel..

Excerpts are from an article originally published in "Wall Street Letter" that can be found on the globalcustody.net website here, reads:

To curtail costs, brokerages are likely to cut trading staff and pour more orders into automatic execution engines on program desks. Josh Galper, consultant with Vodia Group, said that use of algorithmic trading could actually approach 50% of all trading volume for sell-side desks. "Brokerages would receive orders via phone, but if there aren't enough traders to handle them and the orders aren't too complex, they can be routed to an algorithm through the program trading desk," he said, adding that the practice already occurs at several large sell-side desks.

Can't say that I'm surprised because from where I'm sitting, even active portfolio traders are constantly reaching over for their firm's algorithmic servers to take a load off their shoulders. Unless the trader can work a specific name against an active block, the best they can hope for day-in and day-out is to beat VWAP. Doing so for a handful of names might not be all that hard but given access to a good VWAP execution engine, there would be no contest.

But sell-side trading desks won't disappear anytime soon, though they may be whittled down. Sales traders on the desk will be fewer but more sophisticated, said Harrell Smith, analyst with Celent. "The buyside's understanding of algorithms is still imperfect, so the relationship with the algorithm provider will involve a lot of hand-holding for awhile," he said. Already, brokerages are hiring traders with more mathematical and quantitative backgrounds than just trading experience, said Michael Karp, founder of search firm The Options Group.

Quite the elusive task because a good algo which is defined as an alpha-generating piece of trade-execution logic, ultimately becomes nothing more than a system that's designed to beat all other market participants on any given day! A system that consistently (more than 50% of the time) beats VWAP is a system that beats the house! That kind of a system will gravitate towards the domain of "principal-traders" rather than "agency-execution" desks. While, hiring a sales trader who can code a trading-algo in your favorite portfolio trading platform might seem like the way to go, chances are that the piece of logic that constantly eats his lunch, will almost always be developed by the guy trading the firm's own capital from the backroom or a quantitative trader working on a buy-side desk somewhere in Greenwich.