Opinion Poll: Buy-Side Changing Trading Strategies in Volatile Markets
Asia Etrading.com recently conducted an opinion poll in order to get some perspective on how the buy-side was adapting to higher market volatility brought on by the US credit rating downgrade and then the subsequent euro zone debt problems to find out if traders were approaching algorithm use differently.
No change – broker algo’s are performing well: 28.6%
Using different algos: 21.4%
Stopped trading until volatility resides: 21.4%
Relying more on dealers and high-touch trading: 14.3%
Using more alternative trading venues: 14.3%
While 28.6% of respondents claimed “no change”, the increased volatility seems to have motivated traders to adapt and change the way they use algorithms. It would be interesting to know what algos the “No change” camp were using and, more interestingly, which broker.
The remaining responses, however, maintain that traders are trading differently and do provide some insight on just how they are going about it. Robert Liable Head of ETS and PT Sales at Nomura said that “we have seen a movement toward shorter term time horizons (like Implementation Shortfall), and a shift toward DMA as opposed to Algos” lending support to the different algos (21.4%) response.
The use of VWAP as a benchmark in Asia is wide spread but its dependence on historical volume profiles may cause poor performance during volatility where the profile no longer holds. Clare Rowsell, Head of Client Relationship Management, Asia-Pacific at ITG told us “there is a high usage of VWAP algorithms in Asia Pac trying to hit a VWAP benchmark and this could result in a worse trading outcome if traders don’t use stock specific VWAP profiles, and in fact, other algorithms may be better suited to their goals.” It is very likely that VWAP traders in Asia account for the larger percentage of those rotating into other opportunistic volatility favoring algos and alternative venues to find liquidity at a fair price.
That brings us to respondents who admitted using more alternative trading venues (14.3%). A related press release from Chi-East lends credence to this notion. The independent, pan-Asian, non-display exchange experienced significant quarter on quarter increases in order flow from July to September 2011 to the tune of a 203%. Granted, the figures started at a low-base coming in this quarter at US$71.06 million but as a broker to broker alternative Chi-East is something of a barometer in terms of alternative trading venue usage in Asia.
14.3% of respondents affirmed that the decision to rely more on dealers and high touch trading was how they were coping in a volatile market. The expertise and skill-set of dealers who can work orders for names which they are intimate with are an acceptable alternative for someone who is willing to pay a much higher price to find liquidity.
Those stopping to trade entirely until volatility resides made up 21.4% of those polled. Not good news for brokers. This might be an interesting opinion poll to ask in up markets that are volatile as perhaps these traders are all in cash and waiting until stocks move higher.
Ultimately, the majority of the feedback we received confirmed the obvious, which is that market volatility is presenting challenges to profitability. If Darwin was developing algos perhaps he might of said “It is not the strongest algorithm that survives, nor the most intelligent, but the one most responsive to change.” With little reason to expect volatility to wane in light of the ongoing global malaise one would expect to see the need for algorithmic trading adaptation to continue.