What should be prioritised when it comes to algo selection?
The are several key things I look for as it pertains to algo selection, first would be market access. Access to liquidity is key, algos that have access to the bulk of venues, exchanges and pools that we can have our orders exposed to is critical for optimal pricing. Second, would be historical benchmark slippage, as we target various benchmarks in our execution, staying in-line or outperforming the given benchmark is very advantageous to our overall objective as traders.
Third, would be impact balancing – all orders have different levels of urgency, with higher urgency orders potentially being the most impactful, you still want an algo that prioritises best price (passive touch, mid-spread) while achieving the desired volume/completion targets.
In your opinion, what is the best strategy when it comes to assessing algo performance?
I can’t say with confidence that there is a ‘best’ strategy, given the vast scope of the market and dynamic aspects of its structure. My personal preferred strategy of assessing algo performance would be a relative/peer assessment approach versus common benchmarks in similar order types and metrics.
What’s the biggest roadblock when it comes to algo adoption?
The biggest roadblock when it comes to algo adoption is broker differentiation. Algos are a great tool for equity execution, however, amongst the standard benchmarks and strategies such as VWAP, implementation shortfall (IS) or percentage of volume (POV), it can be a challenge to select the ‘optimal’ broker algo given the close similarities they all possess. For example, targeting percentage of market volume, a pretty straightforward and achievable strategy, doesn’t normally see much deviation per broker across the normal evaluation metrics.
How is algo usage evolving?
I would say algo usage is evolving in two main ways: customisation and tech integration. Customisation in a sense that instead of a ‘one size fits all’ approach, to an industry with thousands of traders, both buy- and sell-side, executing a wide range of strategies, brokers are offering custom settings and tweaks that are best-fit for the given firm/user.
Secondly, there looks to be a big ramp in the tech integration space as algo offerings look to be more applicable and user-friendly for the various EMS and OMS. I have also seen providers leverage the abilities of add-ons and plug-ins for additional analysis and visibility on orders.
In The TRADE’s recent algo survey, 45% of buy-side traders reported using five or more providers, is this a surprising statistic?
Not extremely surprising – as a primary consideration of traders is the need to mitigate risk. With this, given developments, upgrades and occasional lapses and latency, having ample options helps preserve firm capital and minimises sunk costs in the presence of these issues.
As it pertains strictly to variability, it is somewhat surprising – as previously noted, providers’ algo suites are normally very similar in offering. However, another perspective to counter that statement is that every incremental increase in liquidity exposure you can get, counts when trying to achieve best execution.