Show me the algo. And then show me the data from the algo. Now, please.
That’s what the buyside is telling is algorithm providers, one senior executive told Traders in a recent interview. Whether one is a bulge bracket broker-dealer, agency-only broker, boutique firm or vendor, institutional investors want to know in more detail than ever how their brokers’ and providers’ electronic trading tools work – from the moment the trader clicks on the algo from his order or execution management system on his desktop to the confirmation of the execution.
David Margulies, head of the electronic products group at agency-only broker Weeden & Co., in an exclusive conversation with Traders said that while this trend of buyside wanting to know more about how algorithms work and their routing logic is not necessarily new, the increased amount of overall inquiry from the buyside has increased in the last several months. And the depth of information that the buyside wants from its brokers has gone from the basic details to questions about coding and logic methodology.
“There are lots of question on how the algos work that we get,” Margulies told Traders. “Things not just like where the order goes. But the buyside wants to see that data that bears witness to what venues the order went, at what time, why did it go there and so on. On a granular level, they want that data that goes into the algo’s decision-making process.”
The recent increase in the request for supporting data stems from the recent hubbub surrounding dark pools – with many wondering just what kinds of firms are lurking within them, why are they chosen as an order’s destination as opposed to an exchange, why one dark pool was chosen over another and in the case of broker-owned pools, does the broker cross orders with itself rather than with another party (internalization). Recently, Barclays has had to defend its order routing practices regarding its LX pool as the New York Attorney General examines if the pool has committed fraud or not. And Barclays isn’t alone, Margulies said.
“While we have no internalized dark pool, as we are agency-only, firms like Goldman Sachs and others have more questions to answer,” he said, referring to their dark pools and other crossing mechanisms. “For us, people know we’re not trying to cross an order at our prop desk. Every day there’s another accusation of enforcement action that shows the need for this type of transparency.”
Weeden’s exec added buysiders, from the smallest firms to the biggest money managers are asking questions about TAG 30.
Tag 30 is that part of the trade’s FIX message that contains data about the venue at which an equity trade is executed. Tag 30 discloses the market of execution for last fill. It also tells where an order was routed. This is for all U.S. equity trades.
“These Tag 30 questions are very prevalent. Guys are asking such in-depth questions as ‘what capacity was the order executed and whether ‘we added or took liquidity’.”
Weeden, and its competitors, are now being asked to disclose this data faster and put it into a standardized format that all buysiders can use.
“While we’ve always had this trade info, even before the Tag 30 mandate, now we’ve been focused on building a system around these requirements and being able to respond to data requests faster,” Margulies said. To that end, Weeden has created a new infrastructure to have this Tag 30 data formatted, more accessible and deliverable to its clients.
“That’s the bottom line these days – people want to know what’s happening with their order and looking for data that quickly shows how things work,” Margulies said.
