Published On: Thu, Nov 1st, 2012

How Do You Select Algos Before Trading?

Question:
How Do You Select Algos Before Trading?
Purpose:
We asked the industry how it is that they chose the algorithms they use. Both the buy-side and the sell-side will be motivated differently and we wanted to how.
Results:
How Do You Select Algos Before Trading?

How Do You Select Algos Before Trading?

Analysis:
The equity trading business has been a tough environment since 2008 whether you are on the buy-side allocating assets or on the sell-side generating commission. Using the right algorithm can mean the difference between boosting a fund’s performance ranking and whether or not a broker retains its customers for the next trade. We put this opinion poll to the industry in order to gauge how firms are selecting algorithms before trading under the current tough market conditions.

The high number of “DMA order” responses, at 40.63%, was perhaps not surprising. There are a number of possible explanations for this. Firstly, many securities in Asia are quite illiquid and placing small limit orders is an ideal way of getting a reasonable price without moving the market too much, particularly in a low volatility environment. Additionally, not all buy-side firms are tapped into broker algorithms as Tier 2 / 3 firms are still putting together this offering for their clients.

The second highest response at 31% said that the algo chosen “Depended on the name being traded”, indicating a sophisticated buy-side base that are using several algorithms on any given day to minimise trading costs and maximise their fund’s returns. At Asia ETrader we had expected a higher number of respondents to be supporting VWAP (only 15.6%) as this algo type tends to be favoured in Asia as both an easy way to place a trade and to realise the benchmark among their peers.

We hope in the future that this response continues to trend lower.

For 9% of respondent to go with “Whatever my broker recommends” was interesting to see. Buy-sides who are reducing heads at the execution layer are now depending on their brokers to help them in the investment process. Advising clients on which algorithms is a service that appears to be on the rise as the level of support continues to improve in this very competitive business. Just over 3% chose the “High-touch service” response. In markets with low volatility, and during the summer doldrums, the use of high-touch and more expensive execution would seem to be waning. We do not see these types of trades disappearing forever as different markets and clients will always have the need for services that algorithms just cannot cover. A question we ask in our piece on algo advisory desks (see page xx) is that if brokers are telling their clients which algos are better suited to their trading needs, why do their clients need to go to the high touch desk anyway? They could save 80% on commission.

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