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November 2, 2011

Algo Consolidation Speeding Up

By James Armstrong

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  • Algo Consolidation Speeding Up

Fewer is better. That's the message brokers have been hearing from clients over the last year, as buyside traders have reduced the number of algorithms on their desktops.

"As a trader, you reach an inflection point where it is intellectually impossible to evaluate, understand, and measure the real-time performance of all your different strategies, and identify the appropriate scenario to apply them," said Tim Reilly, head of North America electronic execution sales at Citi.

About two years ago, that led to a movement to simplify the front end and the order ticket to create more efficiency in work flow and strategy selection, Reilly said. With the increase in volatility, change has become more rapid.

In fact, Reilly sees the period of July 25 to the present as a radically different execution environment from the beginning of the year. Clients want to streamline for the new situation, but at the same time they are looking for increased customization.

Reilly said there's a much more active engagement from clients around how to best utilize their electronic toolkit.

And that doesn't just mean using algos in isolation. He said buysiders are evaluating all the different options they have-capital, sales trader, electronic trading toolkit, crossing network-and finding a suitable map for the best execution for that order.

Since July 25, Citi has found its average order size is up by more than a third in participating algos. Meanwhile the average duration of an order has declined by more than 10 percent. Due to the explosion of volume, algos are trading larger orders, faster.

Reilly said some clients are trading too rapidly, and they're creating an impact on the market. He said Citi is working closely with clients to help them to adjust their strategies so they can achieve the best trading outcomes.

Bank of America Merrill Lynch has gone so far as to consolidate its algo platform globally. The firm's Instinct product allows clients to fine-tune parameters on an order-specific basis, choosing a level of urgency from one to five.

The firm rolled out Instinct just in time for the massive volatility this August. That provided for a natural stress-test of the system, and the company says adoption of the new product his been high. 

Michael Lynch, BoA Merrill

According to Michael Lynch, head of Americas electronic trading for BofA Merrill, Instinct simplifies the front end and puts the complexity on the back end. It's designed to work with all levels of capitalization, but because it is signal-based, the benefit is most noticeable in stocks with an inconsistent volume pattern, he said.

Lee Morakis, head of execution services sales at BofA Merrill, said as algo consolidation continues, he could see clients cut back to using only four or five different algos. That might not happen for another year, though, as traders get their technology in line with where it needs to be, he said.