Jul 18, 2012
SocGen enhances algos to sidestep HFT
Société Générale
is rolling out new algo functionality that lets institutional investors improve execution performance by avoiding high-frequency trading
(HFT) strategies.
The new tool,
called Smart Hit, is an ‘algo manager’ that sits on top of
the French broker’s existing algorithmic trading suite. It is specifically
designed to mitigate the risks associated with using passive orders in markets
characterised by a large proportion of HFT.
“The changing
nature of market participants that trade across stock exchanges and
multilateral trading facilities means the common assumption that passive orders
typically capture half the spread is actually more nuanced,” Mark Goodman, head
of quantitative electronic services, Société Générale, told theTRADEnews.com.
“We have tried to counteract this through greater use of aggressive orders that
use the same signals and models used by HFT firms.”
According to
SocGen analysis, some HFT firms see passive orders from institutional money
managers as a source of profit when looking for trends in rising markets, or
use them as a type of ‘insurance policy’ to close out positions when they need
to exit the market.
If either of
these scenarios arises, institutional investors may have to increase their aggression
to complete orders before they are disadvantaged by HFT firms, which can add to
execution costs.
Reading the signals
Smart Hit
measures the strength of market signals, such as volatility and price prediction models based on correlated instruments, and uses this to determine the best
time for institutional investors to trade and avoid flow which could be
considered toxic.
If a market
signal is deemed to be very strong and therefore attractive to HFT firms, the
algo will avoid competing. For medium signals that may not prove to be as
profitable for HFT firms but are also not
necessarily being monitored by other agency brokers, the algo will increase its
participation.
Goodman added that buy-side
firms need to recognise the speed advantage held by HFT firms to optimise
execution performance.
“Given that we
are an agency business, we need to balance the need to wait for a good market
signal to trade and the urgency of an order,” said Goodman. “Brokers need to
recognise that HFT firms will always be faster. Options for co-location are
limited for many sell-side firms that need to optimally locate across multiple
markets, rather than HFT firms that focus on a single-venue strategy.”
A number of other
brokers have also calibrated their algorithms to help the buy-side deal with
HFT flow. In April last year Deutsche Bank unveiled Stealth, a strategy that
uses short-term indicators – such as stock
valuation and order placement – to offer buy-side traders similar tactics to
those used by electronic market makers and statistical arbitrage traders. In
May this year, Wedbush Securities, a US full service brokerage announced it had signed 10 buy-side firms to its new execution service that offered
institutional investors the same technological capabilities as HFT firms.
Anish Puaar
+44 (0)20 7397 3817
anish.puaar@thetrade.ltd.uk