Knight’s Sumo tackles chunky trades
Agency broker Knight Capital's liquidity-seeking algorithm has been dramatically overhauled to account for an evolving market structure characterised by growing levels of high-frequency trading (HFT).
MD Joe Wald said the broker has “radically redesigned” Sumo, one of the first
algorithms designed to use real-time and historical liquidity measures to
complete an order as quickly as possible – to account for the increasing
use of HFT strategies and their impact on liquidity.
objective is still the same. Institutions can block trade while avoiding short-term
alpha strategies which can have a negative impact on execution quality. But now
it’s not about being liquidity seeking. It’s about size discovery,” said Wald.
strategies now so advanced they can anticipate traditional smart order routers
using price discovery, Sumo’s size discovery methodology seeks the largest
order at each venue to complete as much of the trade as possible before other
market participants can benefit from the information.
another new feature of Sumo’s underlying strategy was signal-based trading. The
algo collects data on size and quote from the lit markets and through Knight’s
Order Awareness technology, it gains feedback from recently completed
executions at Knight to determine the best liquidity venue or venues,
appropriate order size and timing. Concurrently, Sumo emanates
liquidity-seeking signals which don’t look like typical existing participation
strategies, helping protect client orders from aggressive short-term traders.
“There is a huge
amount of HFT out there but within that liquidity there are different types of
flow and not all of it is bad,” said Wald. “You need to decipher what is the
more benign and what is the more aggressive.”
Sumo aims to
distinguish between passive or neutral electronic traders. Wald said some
high-frequency strategies can glean more and more information from the slice
and spray approach of many buy-side algos, making ‘cost-biased’ smart order routers
less effective over time.
with a ‘size-biased’ routing strategy to find larger blocks of liquidity at
fewer venues, moving orders through the marketplace in such a way as to reduce
information leakage,” said Wald.
British and European buy-siders can access Sumo and Knight’s other algos
through Knight Direct’s broker-neutral electronic trading platform and through
order and execution management system providers.