Last month, Deutsche Bank un- veiled anew suite of algorithms aimed at buyside options traders. As part of the bank’s Autobahn electronic trading business, Autobahn Options offers U.S. equity options trading capabilities including access to the Chicago Board of Options Exchange, International Securities Exchange, NYSE Arca, Boston Options Exchange, BATS Options and NYSE Amex. Autobahn Options also includes a suite of algorithms designed solely for options traders and their strategies. Traders Magazine spoke with Jose Marques, global head of electronic equity trading, and Jay Fraser, head of equities in the Americas, to find out how the options trader differs from the equity trader, what need there is for new algos in this asset class and whether they missed the boat when equities lost steam after the global financial crisis of 2008.
Is Autobahn Options an update or a new trading platform?
Jose Marques: It’s brand new. We’ve had some offerings in this space, but this is a holistically new offering. It’s new front to back, with market-leading functionality, and we hope our clients will think so as well.
Why introduce algorithms for trading options?
Marques: It’s a natural extension of what we’ve been doing around equities. Deutsche Bank rebuilt its electronic franchise starting around four years ago. It was nice timing overall because it was after the seminal 2007 shift to electronic-based liquidity provision in the marketplace. So it gave us an opportunity to build for the going-forward market structure rather than the looking-back market structure. We have been extending those products, and equity options was basically the next thing in line.
Is Deutsche Bank late to the options algo market?
Marques: No, there are several very good products out there, and then there are trivial products in the sense that they’ll route an order by a call to a DMA venue or use some very simplistic smart order routing. This solution has sophistication built in within the options executions space that has not really been addressed.
In your experience, how do options traders differ from equity traders in what they want from algos?
Marques: On one level, they have some of the same requirements, which are driven by market structure. The options world, like the equity world, is highly automated and highly electronified-and it’s highly fragmented. Therefore, having a set of tools that lets you deal with that fragmentation is very important.
The other point is, when you look at who provides liquidity into the options world, it may not be the same exact players, but it may be the same types of players as in the equity world. These are highly automated, electronically driven liquidity providers. There is very little difference in what they are doing.
Where they differ is the complexity of the trades. The complexity for some participants, not all, does vary. A lot of the types of orders in the options world are effectively pairs of trades, such as multi-leg options trades, that might include a hedging component where you want to execute stock alongside your options. So some of the actual strategies are a bit more complicated, but a lot of the underlying needs are the same.
Jay Fraser: Alternative asset classes are gaining in popularity to provide investors hedged exposure to equities. One of the fastest-growing areas in asset management is alternative asset funds. Whether simplistic strategies, like writing single-legged covered calls or more complex volatility-based, longer-dated or synthetic solutions, clients are looking to expand their use of derivatives. We can compete not only via the quality of our execution platform, but also with the market-leading research we provide to clients looking for trading ideas in listed derivatives.
The space has been growing despite the lack of EMS platforms that can handle complex multi-legged transactions. As EMS platforms roll out multi-leg options capabilities with support of the underlying stock as a reference price, clients are asking for more sophisticated delta-adjusted execution strategies. We are dovetailing our product improvements as the technology improves in the EMS space and takes some trades off the desk and into algos.
Can a trader use these options algos in any OMS?
Marques: It’s completely broker-neutral. It’s not out on all of the 60-plus platforms we have on the equities side yet, but we are rolling it out based on client demand.
Is Autobahn Options live now?
Fraser: Yes, indeed. Clients have been using Autobahn Options, and we have a number of different solutions-whether they want to use algorithms or want to be direct or connect to certain exchanges-both on a high- or low-frequency perspective. We have been using it internally with some clients and our desks for four months now to battle-test all the connections and strategies.
In this age of trading glitches, what goes through your mind when you roll out a new algo?
Marques: There are some points to consider when rolling out an algo and an electronic product, and that has been well recognized for years. We have a well-documented protocol that we call our Minimal Control Framework. Every electronic offering, whether it’s external- or internal-facing or a combination, has to have [these controls] in place to be approved for use in the bank. So we start with that: We apply best practices around testing and release, segregation of responsibilities so that developers only take it so far; and then production management takes it for the next leg, and then operational people take it into everyday use. We have real-time monitoring at the desk level and the infrastructure level, so there is a lot that goes on to put out even the simplest electronic product within our framework.
Traders Magazine keeps hearing about how the buyside and sellside relationship has changed. Is the buyside demanding more than the sellside can deliver while commission dollars are tighter?
Marques: When has the buyside not demanded more service to be delivered more efficiently? That has always been the model and the key driver of innovation in our industry. I think from the DB perspective, what has changed is the types of models we are willing to support for our buyside clients. There are buyside clients who run integrated trading functions where they have their high-touch and low-touch derivatives and multiple asset classes all wrapped up in the same desk, and that’s the way they run their business. For that type of trade desk, a single point of contact may make the most sense. This means they don’t have to manage seven touch-points within the firm.
Some of our clients want a holistic coverage model. Many clients still want bespoke electronic coverage separate from their program coverage, and that’s usually because they have specialization on their side.
Our view is: We are here to serve, and we will support whatever model makes the most sense for you and your trading. And then work around that to deliver maximum value.
Even with tighter commission dollars, is this a situation where the sellside is getting much less in return? Is this a factor on the buyside relationship as well?
Marques: At the end of the day, all our clients are going to get the service level that they require and are used to. We’re not holding back on services and are using technology and innovation to meet those needs.
What is next for deutsche bank’s Autobahn team in terms of algos and services?
Marques: Our focus is on providing very high-quality coverage and direct interaction with the trading client base around the electronic trading product. The whimsical notion that there’s a thing called low-touch and high-touch with different service levels is total bunk. At most shops, it’s the same trader pushing the buttons. Sometimes he sends an order to a high-touch desk, and sometimes he routes it to an electronic platform. He still wants the same level of color, the same level of feedback and to be able to pick up the phone if something is not working properly. Or he wants to ask if there is a crossing opportunity. These kinds of things are very real, and we’re working to really support that.
Fraser: It’s now a more of a level playing field from a product perspective-that wasn’t the case for Deutsche Bank just a few years ago, as we were playing from behind.
The next stage of our evolution is to leverage the open container we built to provide customized solutions clients can use to implement alpha. We provide that to our largest clients and use that experience to improve our entire suite of products.
Secondarily, being a trusted partner to the buyside to provide unbiased fully transparent best execution advice. Whether it’s intraday or longer-term analysis, idea generation, suggesting more creative ways to trade or helping to process small orders systematically… we can provide all our clients with a superior outcome. There aren’t many firms that have that ability to offer the entire spectrum to clients.
It’s a competitive space, but there is an advantage to scale.
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