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volume period and volatile time for traders as everybody is typically rolling in the same week to the next expiration date . In recent years , this activity has evolved from manual , voice-based trading to more electronic , low-touch trading .
“ Previously , a lot of this business was executed through voice desks and one reason for that was because trading systems out there couldn ’ t handle multi-leg products ,” he says . “ As those systems have been developed in the last few years , we found more of that activity moving to electronic channels .
“ A lot of volume goes through on calendar rolls and the challenge is around optimising that experience for the clients rather than imposing a model of trading without looking at the particular client objective .”
In response to the trend and client demand , JP Morgan developed a model of its Aqua strategy , known as the Roll Algo , which went live not long ago for the most recent US treasury roll in February . It has been especially popular with buy-side traders , according to Ward .
“ The Roll Algo model focuses on maximising liquidity and pricing opportunities by using signals that help it understand when to cross the spread . It ’ s the most important area we are working on and has peaked the greatest interest from clients .
“ It performed really well in February and there was a lot of client use in that period . With that , the algo learned a lot along the way so we can expect the performance in the next quarter ’ s roll to be improved .”
The Roll Algo is not the only new addition to JP Morgan ’ s new strategy line-up . Advanced strategies like Target to trade around the cash or futures close , Multi Leg Strategy for trading multiple instruments at the same time across futures and US treasuries , and options algos have also been developed by the bank .
Volumes in options on futures surged in 2020 as trading floors at major derivatives exchanges like CME that facilitate options trading were forced to shut down . As a result , liquidity shifted to low-touch and electronic channels and JP Morgan ’ s clients began to ask more questions about trading options through algorithms .
“ Options on futures volumes have seen significant growth in the industry over the past few years and 2020 was a breakout year for liquidity on-screen ,” Ward adds .
“ With that said there are still challenges and nuances to trading them and that ’ s where we see opportunities to innovate and help our clients with their execution . This can be through simpler Peg and Cross type strategies and ultimately more targeted strategies using a delta or volatility reference .”
" Five years ago , there were pockets of interest in executing this way , depending on the specific trader or firm ’ s appetite . It ’ s now become far more mainstream ."
JP Morgan expects buy-side adoption of futures algo trading to continue increasing in the near future , having been driven by ongoing market developments and trends over the past few years .
Explicit regulatory requirements on best execution and growing appetite among the buy-side to address challenges in futures and options market structure have been instrumental in the growth of this trend . Best execution essentially forces traders to establish benchmarks to measure performance and trading through algorithms can provide an effective way to do this .
New products have also entered the market where liquidity is shared on multiple markets , which presents challenges in trading those products . Nifty derivatives , for example , are now tradeable in both Singapore and India after the Singapore Exchange ( SGX ) and India ’ s National Stock Exchange ended a two-year dispute which put SGX ’ s futures into question .
Other developments such as extended hours in futures markets also means there are now more hours to trade what is often the same amount of volume .
62 // TheTRADE // Spring 2021