Lite Trading lures hedge funds with heavyweight ideas
At first sight, Lite Trading doesn't easily fit the stereotypes about stockbroking firms. For a start, its name sounds a bit flippant. Secondly, its offices are located not within the Square Mile, but in the less well known financial centre of Southend. Thirdly, one of the key selling points it is offering hedge funds is the use of technical analysis in generating investment ideas.
But appearances can be deceptive. 'Lite' is not a reflection on the seriousness of the business, but an acronym for Local Independent Trading Exchange. The firm's presence in Southend reflects both a convenient location that avoids wasting time commuting for its principals and a reflection of the increasing irrelevance of location, at least in theory, in an age of instant electronic communications and transactions.
And according to chief executive Iain Rogers, a veteran of SG Warburg and HSBC who founded Lite Trading in 2003, technical analysis is about to come of age in the UK. In the United States it is already well established as an investment tool, but he argues that its acceptance within the global investment industry is inevitable once professionals have a clearer understanding of what it can and cannot do. In the meantime Lite Trading aims to make the most of its head start.
'Technical analysis is only really used extensively in the US, where it is used not to pick trades but as a tool to assist to your own trading strategy,' Rogers says. 'Its popularity over here is growing slowly, but we envisage that it will snowball over the next five years, and people will either have to use a specialist firm or educate themselves. We aim to be one of those specialists.'
Lite Trading, which holds advisory, execution-only, discretionary and fund management licences from the Financial Services Authority, currently has 10 staff in Southend, including directors, sales, trading and service staff, serving institutional and private clients, but Rogers envisaging numbers quadrupling within the next one to two years as the firm differentiates itself from its competitors both by its independence and an innovative approach to research.
The firm is already planning to move at least part of its operations into the City later this year. According to Rogers the move is necessary in order to recruit the kind of high-quality staff the firm will need if it is to expand as expected over the next couple of years, but also because with an expanding client base it makes sense to have a base that facilitates meetings with clients - like Lite Trading's growing roster of mostly West End-based hedge funds.
The firm is keen to emphasise that technical analysis is by no means a trading strategy in itself. Says Rogers: 'Technical analysis represents just one third of the process by which we come up with our trading recommendations, alongside our own market intelligence and fundamental screening. However, it's an important tool in developing risk strategy and in deciding the timing of entry and exit trades.'
Up to last November, the technical analysis provided by Lite Trading focused primarily on candlestick analysis carried out by Clive Lambert, a board member of the UK Society of Technical Analysts, but the firm has now extended its scope to point and figure charting. 'Put simplistically, point and figure measures the trend, while candlestick analysis measures price action against volume,' Rogers says. 'Putting the two together, hopefully, puts the odds in your favour.
Lite Trading publishes a suite of daily and weekly reports covering the FTSE 100, FTSE 350 and EuroStoxx 50 indices. Says head of institutional sales and trading Darren Sinden: 'We issue a daily report before the market opens that rounds up what's going on, what's in the press, market rumours, downgrades and upgrades. But each day we also track technical signals such as key day reversals, moving average crossovers, top five gainers and losers, and the top five or six stocks that are exhibiting volume in excess of a 20-day moving average.'
'We produce a Spotlight report once a week for the FTSE 350 and EuroStoxx 50, providing a much deeper technical overview of the indices and their trends. We look at aspects such as breadth of participation, so we know the percentage of stock participating in current trends, and have an idea whether an index is being overbought or oversold, or is coming back into some kind of equilibrium. In addition, we produce a few reports a week on our high-conviction ideas.'
He adds: 'Our reports are simple to understand and digest, with clear calls to action. Technical analysis can appear quite intimidating, even to market professionals, but we simply aim to use it as a framework for our trading strategies. It feeds into what trading is all about - trying to maximise your profitability, minimise your losses, and get your risk-reward ratio skewed the right way.'
What technical analysis provides, according to Sinden, is leading indicators. 'An analogy that I like is looking at a lake and seeing ripples that might indicate a big fish under the surface,' he says. 'It can give you an edge if you spot that a price is going to break through a certain level earlier than other market players. The movement may be driven by fundamentals, but technical analysis enables you to pre-empt that.'
Rogers adds: 'Used properly, technical analysis can give you a predictive indicator, because our model will pick up on volume advances. Several times this year we've seen price action that was abnormal for the market, and we've known straightaway that something was going on with the stock in question. A few days later something's been announced like a profits warning or takeover speculation.'
Technical analysis is not the only source of leading/ predictive indicators that Lite Trading is offering its clients. In collaboration with Ipsos MORI, it is planning to use opinion surveys to identify business trends and hence investment ideas, allying the research firm's expertise in gathering, collating and interpreting data with the stockbroker's ability to analyse the results from an investment perspective.
Says Rogers: 'Over the coming months we will be offering our clients leading-indicator research on any stock or sector they wish to know about, although the easiest sector to apply it to is retailing. We see this as complementary to what we already do, but it caters to clients who want something more fundamental than technical analysis. Because of the nature of the polls, you can turn around the research very quickly. Some surveys can be carried out within a week, and technically it is possible to devise the questions and have the responses back within 24 hours.'
He argues that survey-based research can challenge the guidance provided by fundamental analysts, or indeed by companies' chief executives and chief financial officers. Says Rogers: 'Ultimately we'll be asking the man on the street or business-to-business customers to see if there's any disparity with the official views. This could be of interest to hedge funds looking for mispriced assets.'
To read the full Lite Trading weekly FTSE 350 reports and have them delivered to your desk top please click here
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