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Algo innovation not a
straightforward path as traders
want to retain control
Buy-side traders still want to be able to stop algos and take control
in-flight, but data challenges remain for those seeking a low-touch route.
T
he depth and breadth of
innovation around algos in
the FX space is a source of both
simplicity and complexity for the
buy-side, although some are not
convinced that the industry is
going in the right direction, ac-
cording to panelists at this year’s
TradeTech FX Europe conference.
A discussion on the use of algos
in FX markets featured both
buy- and sell-side institutions and
there were numerous opinions
as to the progress the industry is
making, particularly where the
issue of access to liquidity via al-
gorithmic trading was concerned.
“There are almost two separate
threads that sound like they are
contradictory; are algos getting
smarter and more complex, or
are they getting simpler and more
accessible? Our view is that it is
both and those two things are not
incompatible,” said Allan Guild,
global head of alternative execu-
tion services at HSBC.
“It’s about making sure that
our clients understand the algos
and the strategies, in terms of the
inputs and how they are choosing
to execute, which can be straight-
forward. The complexity and the
smart comes into the execution of
the individual child orders.”
Meanwhile, Ralf Donner, global
head of client FX algo execution
at Goldman Sachs, said that while
the accessibility of liquidity and
the management of liquidity
providers should be considered
important, it represents just one
side of the algo innovation debate.
“The other side of the equation
is actual product innovation,
which has taken a step back in
recent years, but it’s coming back
to the fore, and this is concerning
things like how do you executive
portfolios effectively, how can you
provide tools to options traders to
execute that are useful for them,
how to execute things that in past
couldn’t be done on algos such as
NDFs or outright forwards, maybe
one day swaps; there is a lot of
product innovation that is actually
coming online now or will be
soon,” said Donner. “Maybe then
the liquidity side of the argument
will reach a certain maturity and
we will be able to put it behind
us.”
When buy-side firms choose to
use algos to execute orders, they
take on the risk of those orders
themselves, and using algos that
they perhaps are not familiar with
or are not suitable for a particular
strategy means that some firms
are hesitant to use technology
from outside sources to achieve
the best execution outcome.
“Although we keep trying
sell-side algos, because there is
nothing more I like than to just
retire a technology stack and
outsource it so that I can take that
development resource and apply
it to alpha generation, we keep
going back to our own algos,” said
Hasan Amjad, head of algorith-
mic trading at GAM Systematic
Cantab.
“We may be partially biased
towards our own technology, but
also possibly because our own
algos tend to do much better,
perhaps because we are tapping
into the internal order books of all
these liquidity providers, which
a single provider simply doesn’t
have access to.”
There is also the issue of the
buy-side fully handing over
control of execution orders to
algos, with many traders still keen
to take control of orders “mid-
flight”, although this does run the
risk of muddying the data that is
then used to analyse trades after
completion.
“It is, after all, empowering to be
able to change your algo mid-ex-
ecution and make adjustments as
you see market conditions either
deteriorating or improving," said
Goldman's Donner.
Issue 61 // TheTradeNews.com // 41