[ M A R K E T
R E V I E W
M
|
A L G O
W H E E L S ]
iFID II will see an increased emphasis on
justifying choices made when executing a
transaction. It requires traders to take ‘all
sufficient steps’ to ensure best execution for clients on
price, cost, speed, likelihood of execution and more.
The key difference come January 2018 will be how
firms plan, monitor and ultimately prove they have
attempted to achieve best execution.
Speaking to The TRADE earlier this year, Rob Board-
man, CEO of ITG Europe, explained some of the impli-
cations of the increased focus on conflicts of interest
under MiFID II are not as well known as other aspects
of the regulation like unbundling, market structure or
dark caps.
“On the trading side, there is a lot of scrutiny within
asset management firms reviewing their compliance
around choosing brokers,” Boardman said. “Regulators
no longer accept the reasons often used in the past,
instead they want solid evidence and proof.”
MiFID II means the buy-side will be pressured to
plan, monitor and demonstrate that an effective best
execution process is in place. Alongside this, regula-
tory technical standards have outlined the need for
governance and testing for buy-side firms using algo-
rithms. With countless algorithms available world-
wide, firms are tasked with sifting through the noise in
order to achieve the best result for clients. A repetitive,
yet important task for any trader under MiFID II
obligations is to select the right broker and algorithm
based on a variety of factors.
“Too many algo choices is a problem if a firm cannot
efficiently navigate through them,” says Rich McGraw,
senior vice president, global multi-asset EMS/OMS
sales, FlexTrade. “If a buy-side firm has hundreds of
algos and no way to consistently decipher which ones
work well for specific order types, best execution
could be at risk.
“Without taking systematic steps, ranking brokers
with difficult orders against brokers with easy orders
will produce too much inaccurate analyses - or noise.”
Traders are required to have a detailed knowledge
of the functioning of the algorithms they use and
44
TheTrade
Autumn 2017
they must evidence this. In this
context, it can be difficult to claim
a detailed working knowledge of
more than a handful of algorithmic
trading strategies and there can be
a tendency to refine and focus the
list of algorithmic providers.
“The concern expressed by many
is that if algo lists are curtailed,
how can the trader know that his/
her shortlist is and continues to
be the best?” says Chris Jackson,
European head of Liquidnet’s
execution and quantitative services
(EQS) Group. “What process do
they have for continuous evalua-
tion of both the chosen algo set but
also any new algos from different
providers?”
Broker randomisation tools,
better known as algo wheels - a rel-
atively new concept -burst onto the
scene promising traders the ability
to assess, monitor and justify algo
and broker choices to regulators.
With around 1,600 unique broker
algorithms to choose from, iden-
tifying a clear path through the
forest becomes a daunting task.
“The vast choice of algorithms,
in conjunction with varying order
characteristics and market con-
ditions, makes it very difficult to
determine what is ‘normal’ versus
‘outlier’ performance on any par-
ticular broker algorithm or order,”
says Scott Kurland, co-head of
workflow technology at ITG.
“In order to establish a best
execution policy, you need to first
establish a baseline of normal
or expected performance of the