Group Co.
Reinventing Algos: Three Keys to Improving Electronic Trading Tools
Traders Magazine Online News, April 4, 2017
Judging by the sheer number of choices, we are a decade into a bull market for electronic trading algorithms. Market fragmentation and technology improvements have spurred the development of hundreds of new algos, to the point where a trader today can choose between more than 1600 different algo strategies available on their execution management system. Despite the explosion of choice, traders still find the products lacking.
According to a January survey by Greenwich Associates, only 7% of buyside traders are completely satisfied with the off-the-shelf algos marketed by their brokers, with most preferring customized offerings. This points to the need for a fresh look at how algos are developed, deployed and modified. In short, a reinvention of algorithms. There are three key areas to address in a reinvention of algos: simplification, measurement and context. Ben Polidore
Simpler is better
With 1600+ algos on the market, there are too many products chasing similar goals, including a lot of “me-too” algos with different parameters adding confusion to daily workflows. The typical buyside trader employs 3-5 discrete trading strategies based on urgency and liquidity needs, and algo providers should work on meeting those needs through enhancements to a core set of algos, not by creating new ones that are merely variations on a theme.
Measuring up
As the algo marketplace has become more fragmented, algos have become more difficult to measure. This has led to a trend in transaction cost analysis (TCA) focusing downstream on venue analysis. TCA providers and brokers have clustered on metrics such as reversion, fill rate and latency. The attraction of these downstream measures is clear: there are fewer venues (though still many!) than algos and the sample size is much larger. This is a bit of a compromise. Venue analysis has statistical significance but not as much economic significance to your performance. For most institutional traders, market impact and information leakage are the main drivers of performance and venue analysis doesn’t have much to say about those factors. Measuring this information leakage ranks highly among desired algo improvements, with 73% of buyside traders surveyed by ITG in early March citing this as a priority.
Context is everything
For more information on related topics, visit the following channels:
Comments (0)