[ M A R K E T
R E V I E W
|
A L G O
W H E E L S ]
“By using your
algo wheel, or
randomisation engine,
you are truly selecting
brokers based on
performance metrics.”
GUY WARREN, CEO, ITRS GROUP
asset managers to effectively assess and demonstrate
their approach to broker selection.
Dangers ahead
The algo wheel can help towards achieving an im-
partial and best execution objective in the context of
MiFID II. With dealers now being asked to do more
with less and contribute to the investment process,
automating certain parts of the trading blotter can
similarly make them more efficient.
However, there is a danger moving away from man-
ual processes could have a negative impact on trading
performance.
“Algo wheels can work relatively well to make
the trading of the ‘low touch’ portion of the blotter
46
TheTrade
Autumn 2017
more efficient but we have seen
examples where over-automation
of the execution process around
more complex trades has resulted
in significant execution missteps,”
says Jackson.
“There is a danger that over-au-
tomation is a first step to commod-
itisation of the trading process
and risks dumbing down the
skilled and nuanced process that
is trading.”
He adds there have been ex-
amples of situations where algo
wheels and other multi-broker
allocation processes have been
either badly managed or subject
to significant conflicts of interest
occasionally resulting in manip-
ulation of the allocation logic to
favour one party over another.
For an algo wheel to achieve the
best results the provider must be
impartial. This means that for a
broker dealer operating their own
algo - if also providing a wheel -
should not be an algo destination
on that wheel. Secondly, the pro-
vider must have a transparent and
independent mechanism when
used for assessments of transac-
tions. And lastly, it should include
continuous and impartial assess-
ments of new alternative products
to ensure wheel participants are
best in-class.
ITG and FlexTrade are already
off-the-mark – at the time of
publication - with the launch of
their respective algo wheels. We
can expect other financial services
firms to follow suit as MiFID II’s
best execution requirements take
centre stage in January 2018.