ICAP ad 9/9/10 2:34 PM Page 1 SPONSORED ARTICLE HIGH FREQENCY TRADING AND FX By Daniel Torrey, head of New Business-Americas, ICAP Electronic Broking Foreign exchange (FX) is the equities market ‘flash crash’. In highly side by enabling hedge funds and world’s most liquid market and volatile conditions, trading volume on Commodity Trading Advisors (CTAs) to EBS exceeded $383 billion (single trade in the spot FX market through presents significant opportunities count), representing nearly 255,000 the pre-screened credit of an EBS for traders searching for alpha in transactions. EBS provided orderly prime bank. new asset classes. efficient, effective access to prices at Before entering the FX market, OTC FX functions well as a self- all price points, even during the most high-frequency trading firms need to regulated market, as illustrated by the volatile 10 minutes of the trading day understand the different FX trading EUR/USD price action that occurred (see chart). venues available (e.g. independent on the electronic EBS platform on EBS was the first interbank versus bank-owned), and must May 6, 2010, the day of the US platform to permit access to the buy- address a number of technology and integration issues. EUR/USD price action on EBS - 6 May 2010 They will also need to modify their exchange- 5/6/2010 EUR/USD 1.2710 Bid based equities trading 1.2700 Offer Interrupt strategies and algorithms 1.2690 Deal 1.2680 before they are ready for 1.2670 FX. A robust software 1.2660 1.2650 development and testing 1.2640 environment, and a 1.2630 1.2620 rigorous simulated trading 1.2610 environment are also 1.2600 critical. 1.2590 1.2580 Access to high quality, 1.2570 granular market data is 1.2560 1.2550 essential, and FX-specific 1.2540 risk management 1.2530 1.2520 systems must be 1.2510 introduced. 1.2500 1.2490 However, despite the 1.2480 challenges that entry to 18:05:00 18:10:00 18:15:00 18:20:00 18:25:00 18:30:00 18:35:00 18:40:00 18:45:00 18:50:00 18:55:00 19:00:00 high frequency FX trading presents, rigorous The day of the US equities ‘flash crash’ (May 6, 2010) traders using the EBS platform traded record amounts of volume ($383 billion). Market participants executed trades [red diamonds] at all price points preparation and planning amidst significant price swings, with virtually no gapping, even in the most active minutes of trading. will result in fewer frustrations on going live. Daniel Torrey heads EBS New Business-Americas for ICAP Electronic Broking (IEB). Dan and his team’s primary focus is selling the benefits of EBS and EBS Prime to hedge funds, CTAs, FCMs and proprietary trading firms who seek access to EBS’ unparalleled wholesale market liquidity. email: email@example.com
Elec&Algo Report_2010.qxp 9/10/10 10:00 AM Page 6 SEPTEMBER 2010 WALL STREET LETTER ELECTRONIC & ALGO TRADING REPORT Owain Self, global head of algorithmic and reviewed for compliance purposes. trading at UBS. ALGOS IN INTERNATIONAL MARKETS TRANSPARENCY Algos that can be deployed in international markets, especially Next-generation algos will also need to emerging markets, are the next frontier. The sellside is working on provide more transparency in these building algos that are as similar as can be to the algos the traders volatile and highly regulated times. have become used to but that also account for international Owain Self Calculating risk exposure will be on the to- market nuances and risks. Traders are more willing to invest in do list for the next generation and real-time algos can provide foreign markets if they are able to use the same methods they are visibility into an algo’s potential exposure and determine a trade’s currently using for their portfolios, said Dan Pagano, v.p. of risk impact. Risk assessment will be especially critical with cross- strategic alliances at Linedata. asset trades that have multiple legs in a single order and are done ITG recently made its algo suite available in Israel, and both Citi in real-time. If the trade is being exposed too much, the algo can and ITG will be launching algos in Brazil for the first time soon. UBS, be adjusted before the order is executed. “Clients need to see Bank of America Merrill Lynch, Jefferies, Nomura and Deutsche slippage of orders in real time and where the orders are being Bank have also started extending their algo suites for emerging executed,” said Kang. Citi is planning a roll out of its new service, markets such as Japan, China, India, Greece, Australia, Canada, Citi Trade Viewer, which will help clients achieve these goals. The Eastern Europe and Latin America. “It’s important to note that we desktop trading application, to be launched this fall, enables are operating in an environment of rapid market structure change. traders to see every detail of an order in real time using visual This is a global phenomenon, as regulators across the Americas, analysis. Europe and Asia-Pacific are grappling with ways to evolve their rules ITG has increased their consultations with clients in the last few and surveillance apace with the global markets and advanced years so clients really understand how the algo functions and technology,” said Self. This requires the architecture of an what is the best way to use it, Mittal said. Transparency will also algorithmic trading platform to be respectful of core regulatory help with regulation: data used in trading can be collected, stored concerns, while always staying focused on serving investor clients.
ALGO-PipelineArticle 9/9/10 2:37 PM Page 1 SPONSORED ARTICLE FROM ACTIONABLE TCA TO CUSTOM STRATEGY DESIGN Carla Gomes, Ph.D., research analyst, Pipeline Financial Group, Inc. and Henri Waelbroeck, Ph.D., director of research, Pipeline Financial Group, Inc. Most trading desks have tried to introduce Transaction Cost prove to be very difficult when the circumstances of the trade are not Analysis (TCA) into their process, but for over a decade they have known. Pipeline’s most recent developments intend to fill this gap found it frustrating and ineffective. In general, trades are broken and convert TCA into a new tool that up into multiple placements and sent to a variety of brokers can be applied not only to post-trade back-testing, but also to live trading under different market conditions and with different limit prices. and custom strategy design. Inevitably, the end shortfall performance results are biased and A new actionable TCA framework can any inference made from them is compromised. distinguish algo performance from the use of limits or trading schedules The pervasiveness of high frequency evaluate brokers, algorithms and Trading schedules and limit prices, if trading and increased awareness of execution venues in order to select the used appropriately, can enhance alpha, the costs of trading large institutional most efficient. It usually consists of but if used incorrectly, can exacerbate orders have raised the stakes for implementation shortfall comparisons trading costs. In standard TCA, traders, who now face an ever more between competitors, sometimes implementation shortfall costs are fast-paced environment with a wider accounting for trading difficulty measured as totals. Hence, the set of trading tools and venues to measured as a function of order size, separate impact on overall choose from. Traders need to know liquidity and volatility. It is widely performance of the algorithm, the whether they are being taken acknowledged that trading alpha, trading schedules and the selected advantage of and which algorithms are market conditions, speed selection and limit prices cannot be identified. the most effective. Without reliable limit prices also have a considerable Pipeline’s enhanced TCA determines TCA, how are they to know? impact on the outcome of a trade. Yet, the significance of every component these are seldom considered in of shortfall costs. It provides an standard TCA. This limitation is far assessment of the trade-offs TCA is meaningful only in relation to from trivial when a trading desk needs associated with each decision element the context of a trade to determine the providers that deliver and it determines the most The relevance of TCA to strategic the best execution, yet each one appropriate selections. For speed trading decisions has grown with the receives a systematically different selection, market impact is weighed pressure on trading desks to reduce order flow. Inferences on the quality of against alpha capture to decide costs. In general, TCA is employed to execution, even from a single broker, whether an execution with urgency is
ALGO-PipelineArticle 9/9/10 2:37 PM Page 2 SPONSORED ARTICLE worthwhile. For limit price selection, Pipeline’s Alpha Pro suite, a new impact and post-trade reversion, but to check whether there are generation of customized trade also in terms of adverse selection vs. opportunities for tactical price strategies, leverages this TCA opportunistic savings. The latter is selection, execution price savings are framework to associate an optimal identified by the analysis of weighted against opportunity costs strategy to each trade arrival participation rates under different from incompletion due to the price Equipped with the detailed knowledge market conditions and tracking limit. Also, algorithm performance can performance against the Participation of the alpha loss profiles at the time be evaluated in parallel in terms of Weighted Price (PWP). Additionally, of the trade, Pipeline can facilitate adverse selection and opportunistic the performance results provide efficient trading by recommending or savings. With this knowledge, traders guidance to the best approaches in deploying best-fitting execution can devise forward-looking solutions terms of speed and limit price strategies that enhance alpha capture. and be more effective making the management in accordance with the Orders with weak alpha loss are right decision at the time of the trade. specific objectives of each manager. executed with tactical limits, which These enhancements to standard TCA are more effective if deployed transform it from a post-trade Portfolio managers have distinct automatically rather than manually. reporting product into an actionable order creation strategies leading to Orders with considerable alpha loss trading tool that provides direction to different short-term alpha patterns are executed with front-loaded custom strategy design. strategies with reduced timing costs. Just as an institution can implement several strategies from a wide range With customization of trading of well-known styles of fund strategies, the opportunities for Summary management, including growth, value, delivering the best execution do not • An evidence-based selection of best market neutral, indexed, etc., a single end here. A close collaboration execution algorithms requires portfolio manager may also use a between portfolio manager, trader and dependable TCA that accounts for multitude of strategies with his own broker can further leverage this the trading environment. Pipeline distinctive investment style and skill. comprehensive body of knowledge by attends to this need with an Typically, orders originating from long- determining the specific benchmarks, enhanced TCA that identifies term strategies may create the goals to be met and then refining separately all sources of trading cost opportunities for tactical trading, the design of execution strategies and lays the groundwork for optimal whereas orders more focused on accordingly. trading strategy design. short-term returns usually require • Assessing potential alpha loss is at more aggressive trading, early on or at the core of the daily trading decision later stages of the trade. As a result, Pipeline’s post-trade analysis enables process, but quite challenging when the order flow sent to the trader is dynamic strategy performance the sources of order flow are very very diverse in terms of short-term evaluation and fine-tuning diverse and not fully understood. alpha loss profiles and that may Pipeline’s comprehensive TCA is not Post-trade quantitative analysis can require very different execution limited to the validation of trading provide validation to the selection of strategies. Although some orders are strategies; it also provides all the limit prices and trading schedules sent with very specific instructions necessary information to identify with immediate insight into the alpha and goals, there are still many cases opportunities for fine-tuning each characteristics of the order flow. where the trader has considerable strategy. Gradually, some drivers may • Pipeline’s Alpha Pro uses this discretion. A quantitative post-trade lose importance whereas others may knowledge to direct each analysis such as Pipeline’s can help become more relevant and, as a distinguishable trade profile into its the trader do a better job by providing result, trade profiles may also change. best-fitting scheduled trading detailed information on the short-term Short-term alpha loss is one of the strategy. Alpha Pro strategy design alpha loss profiles that characterize components of implementation is dynamic as it capitalizes on each portfolio manager’s investment shortfall that is estimated to validate recurring, forward-looking TCA. style. Each alpha profile is associated trade classification and determine with specific trade arrival settings of whether characteristics of the order order creation time, order size, market flow have changed or remained the capitalization etc., which comprise the same. Execution performance is set of relevant predictors. evaluated not only in terms of market
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