Robert Hegarty
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Reinventing Trading Venues: How AI Can Help Create a More Efficient Market

In this whitepaper shared with Traders Magazine, the Hegarty Group examines how artificial intelligence and machine learning can help traders execute more efficiently.

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August 1, 2010

Broker Focus: Bigger is Better for Citi

By Peter Chapman

"Three years ago, when I came here and looked at the platform, I knew we had to make a choice: Continue to put bandages around it--duct tape it and make it serviceable--or get ready for how the market would evolve two or three years down the road," Kang explained.

The exec chose to completely scrap the platform and build something new. The new system would have to deal with market fragmentation that was "out of control," faster trading speeds and an increase in gaming by HFTs. "Could we have retrofit the existing system to handle of all that?" Kang asked. "No way. It simply did not have enough brainpower to make the decisions it needs to on the fly."

The new platform, in use by Citi's traders since April 2009 and now available to the broker's do-it-yourself buyside customers, is able to suck in a huge amount of both historical and real-time data to make its trading decisions. That's something the old system couldn't do.

Citi's original platform, put together in haste in order to get the broker into the algo business as quickly as possible, could only take in limited data. "Instead of looking at a half dozen pieces of data, we can now look at hundreds of pieces of information," Kang said.

That capability is necessary as there are about two dozen exchanges, ECNs and dark pools where a significant amount of trading occurs. And because those pools of liquidity have differing rules, pricing strategies, degrees of information leakage and kinds of participants, the intelligence of an algo platform becomes even more critical.

Three years ago, Kang explained, the buyside expected its brokers to be able to access all the available pools. Today, they want much more. They want to know to which venues their brokers are routing. Plus they want the option to steer clear of certain market centers. "The buyside is starting to catch on about information leakage," he said.

A recent study by Tabb Group echoes Kang's observations. The consultant surveyed 123 head traders at traditional asset managers and hedge funds and concluded that the buyside was focused on the performance of brokers' algorithms. Traditional asset managers were especially keen on the venues to which their orders were shipped, noting they might want to "dictate the configuration of the routing criteria."

Still, having the latest and greatest algorithm does not necessarily translate into more business, sources said. Relationships count for a lot. Tabb noted "the broader relationship is important for a significant proportion of firms and rates as a factor in the selection process." Harts considers them more than just a factor. "If a buyside trader has the choice of 10 VWAP algorithms, for instance, which one is he going to choose?" he asked. "His decision will be dictated by his relationships. A good sales trader is critical to selling a good algorithm."

Out of the top 13 providers of algorithms, Tabb ranked Citi as No. 7, with a 28 percent share of all buyside traders surveyed. Credit Suisse and ITG rank at the top of the pack.