Top 2014 Trends: Fewer Algos but More Customization

Armed with fewer but more personalized algorithms has been the latest trend in electronic trading.

The days of hundreds of algorithms on a buyside traders desktop order management system are gone.

Now a trader has just a handful of electronic tools from which to enter his orders despite myriad algorithm providers. But the key difference is that the few algorithms in his arsenal are often custom- tailored to his particular needs — built for him from standardized off-the-shelf modules — and very ready to use.

Vendors and brokers alike, aware of the buysiders limited budgets and desire to trade faster and cheaper, have not only opted to offer fewer base algorithms that end users can customize but also offer new tweaks, such as working only during the market open or closing auctions. Armed with fewer but more personalized algorithms has been the latest trend in electronic trading.

Heres how the vendors work it. Instead of creating hundreds of esoteric algo types and incurring all the costs of developing them, they are creating perhaps five or six base tools and offering optional features. One provider likened the process to purchasing a car — having two or three basic models and then allowing users to check off an options list of what they want.

That’s what Bank of America told Traders it was doing to its options algorithm suite. The bulge firm, in response to its institutional clientele, has reduced the number of algos it offers to clients to make trading easier and more efficient. The firm originally offered nine algorithms to trade options. By simplifying its offering, BofA Merrill aims to provide more flexibility to traders by merging the functionality of several algorithms into four core strategies. Traders will no longer have to choose one capability at the expense of another; rather, they will be able to combine complimentary functions, said Jonathan Werts, head of electronic derivatives at Bank of America Merrill Lynch.

Also high on the list of algorithmic developments this year was the focus on weeding out high-frequency traders and others who could hinder the buysides ability to source bigger blocks of stock. ITG and Cowen announced offerings designed to help the buyside find liquidity and achieve best execution. ITGs Smart Limit Algorithm, or SLimit, works by employing intelligent passive trading strategies. It employs sophisticated logic to determine optimal order pricing, sizing and routing in order to balance spread capture opportunities and adverse selection risk. Cowens CLEAN SEEK has the same mission — weed out the smaller and often predatory offers but focus on locating dark liquidity.

Lastly, as foreign exchange trading has grown, so has the need for electronic trading tools. Pragma is targeting the $2 trillion spot market. The firm, acting as a service bureau provider, now offers specific FX tools, ranging from simple TWAP to more complex liquidity seekers that minimize market impact.

Heads of equity trading desks are now being pushed to look at other asset classes — namely forex, Curtis Pfeiffer, Pragmas director of sales, told Traders. We can take what weve learned about trading in the fragmented equity market and apply it to FX.