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July 2, 2013

Buyside Wants Algo Clarity

By John D'Antona Jr.

The buyside is looking for even more insight and control over its algorithms.

That's the viewpoint of at least two buysiders, Mark Kuzminskas, director of trading at Robeco Investment Management, and Kevin Chapman, head of trading at Allianz Global Investors. Both are searching for more information on how their algorithms operate, as well as protection from them should one run amok. Vendors and the sellside are aware of these needs and trying to meet them.

Kuzminskas, speaking at the 77th Security Traders Association of New York Annual Conference in late April, told attendees that Robeco uses algorithms and other electronic trading tools for 75 percent of its orders, but that he is increasingly unclear as to how the different algos slice up his orders, as well as route and select venues for them. This signals a need for more risk controls and transparency into how algorithms are designed and work, he said.

Mark Kuzminskas, Robeco

"Our orders go to so many various venues, trying to understand the routing strategy and the algo's decision-making process is complicated," Kuzminskas said at the time.

In an interview with Traders Magazine, Chapman echoed his fellow buysider's desire for more algo knowledge and clarity.

"Yes, we do discuss how the algos work with our brokers," Chapman said..

Kevin Chapman, Allianz Global

This desire for more information and control was affirmed by Woodbine Associates, a consultancy that recently released a report that said buyside traders want a more knowledgeable low-touch trading staff. The report, "Sales Traders: Asset Manager Expectations from Low-Touch Coverage," said brokers must be able to provide greater transparency into their electronic offerings, such as algorithms and transaction-cost analysis methodology, if they want to offer a better low-touch trading experience.

A majority of buyside respondents said algorithms were the most important item offered by a low-touch desk. And yet only 46 percent of those surveyed said that execution consultants could clearly and succinctly describe the operation and mathematical underpinnings of their algorithmic offerings, 23 percent disagreed that their consultants could explain their algos, and 31 percent were neutral.

"They want their execution consultants to know what they are talking about." Samelson said

At least one broker is rising to the information challenge.

ITG is giving the buyside a peek into how its algorithms are performing in real time with its new algorithm surveillance system, dubbed Algorithms Prism, which provides institutional clients an up-to-date look at how its orders are being executed and where they are being executed-both on a parent and child order basis.

Algo Prism provides up-to-the-second visibility into the activity of each algorithm, such as the predicted and realized schedules, fill details and even the location, type and price of every open child order, said Jeff Bacidore, head of algorithmic trading at ITG.

And that makes buysiders like Chapman happy.

"We are always on the lookout for a new tool that will help us reduce our trading costs," he said. "However, as long as we are achieving our goal of beating the expected implementation shortfall, we stick with what is working."


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