As hedge funds increase their presence on the Street, sell-side firms are turning to technology to capture their order flow and take in profits. Attracting hedge funds as customers is a priority this year for the majority of sell-side firms. As hedge funds approach $1 trillion in assets, these non-traditional investment vehicles have become the latest buy-side heavyweight. There are more than 7,000 hedge funds in the market today, and recent estimates suggest an increase in the number of active hedge funds to 25,000 by 2010. The number of shares that these alternatives currently are trading accounts for a significant portion of trading activity across most markets. For broker-dealers who charge on a per-share basis, the potential of capturing the order flow of a large hedge fund that's going to do more than a million trades in a single day is just too much to pass up. "What's attractive about hedge funds is that they're big players these days," says Jonathan Beyman, CIO of New York-based brokerage firm Lehman Brothers. "You have to go after them because they have a lot of money."
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