Q&A with UBS's Owain Self
Traders Magazine Online News, July 29, 2010
Amid a backdrop of Securities and Exchange Commission roundtables, myriad new regulatory proposals and a changing technology landscape, Traders Magazine spoke with Owain Self, global head of algorithmic trading at UBS, about future trends in electronic trading and order routing.
Owain Self, UBS
Traders Magazine: Describe the state of algorithms today. What is the next generation of algorithm technology going to look like?
Owain Self: Today's algos have come a long way from the days of fixed schedules and rudimentary techniques for order book interaction. They are based on complex mathematical formulae taking in a variety of inputs both historical and real-time. These inputs are used in a continuous calculation, so algos no longer decide at 10 a.m. what they are going to do at 3 p.m. Client demand drives us to assess the market situation based on information in a variety of asset classes, compute faster and be first to react. To keep up with this demand, the technology and processes employed need to continually advance. The super low-latency technology, originally used in smart order routing and market connectivity, is combined with the computing power to run long term optimizations quickly and independently. Interestingly, while algorithmic trading logic grows more sophisticated, we still hear from clients a demand for a simpler order interface and decision-making process, leaving most of the advances having minimal effect on the user interface.
TM: Recent reports suggest the percentage of volume trades executed electronically will match those done in a high-touch fashion. Do you agree?
OS: We'd agree that the trend is likely to continue--but not necessarily aggressively. The distinctions between what is high touch and what is low touch can be a little hard to determine (for example, when a client uses a program desk for efficiency reasons rather than for portfolio management). Institutional clients will move orders between their own desktops and their sales traders based on market conditions, the relative complexity of the order or the liquidity they're looking to source, and the availability of new electronic trading products.
TM: What about the future of high-touch trading?
OS: Exactly where flow will migrate to/from is difficult to predict. For example, as portfolio algorithms grow in functionality, they could potentially gain share from the program desk, but just as easily could take flow from other single stock algorithms which are being used to manage portfolio orders today. There will always be a need for the full-service, worked-order desk. In times of great volatility, we see clients moving orders back to high-touch streams, especially when capital is required. This healthy balance between worked and direct is likely to continue for some time to come.
TM: We hear some buyside firms are building algos or other systems that direct broker smart order routers. What do you know?
OS: Recently, we have seen a trend of some clients utilizing vendor software to route or allocate between brokers' liquidity pools. The software essentially replaces the order management logic of an algorithm that would normally be market-responsive and objective-based. This seems to be driven by a perceived need to more easily and efficiently access multiple sources of liquidity. While fragmentation is understandably a challenge for the buy-side, it's hard to see that any efficiency gain during order entry would outweigh the potential decrease in performance quality.
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