[ C L O S I N G B E L L ]
Algos must adapt or perish in today ’ s volatile market terrain
In an era where frequent bouts of market volatility have become the norm rather than the exception , the recent global equity sell-off following July ' s non-farm payroll numbers serves as a stark reminder of the investment world ’ s perils .
The data contradicted the prevailing 2024 market narrative that the US economy could avoid a hard landing , igniting fresh concerns about the future . Since 2020 , a series of market shocks have created an increasingly turbulent environment for institutional investors .
Compounding this difficulty is the unprecedented move by the world ’ s top central banks to simultaneously shrink their balance sheets . For the first time in history , central banks are collectively pulling liquidity from the financial system . History tells us that whenever a significant amount of liquidity is withdrawn , markets tend to experience heightened volatility .
All of this has ushered in a new reality for global markets , one characterised by frequent and severe disruptions that challenge conventional trading strategies . Therefore , algo trading strategies , which have traditionally been used in more benign market conditions , will need to be revamped to remain effective .
The key to thriving in this era lies in the adaptability of these algos . Static algos , which operate under the assumption of steady and low-rate market conditions , are increasingly inadequate . To stand a chance of delivering returns , modern algos must be
With market volatility more prevalent than ever , algo strategies will need to be revamped to remain effective and successfully seize opportunities , writes Sylvain Thieullent , chief executive at Horizon Trading Solutions .
capable of responding to real-time data and adjusting to the ebbs and flows of market conditions instantaneously .
One of the critical aspects of this evolution is the need for algos to incorporate advanced risk features . In volatile markets , the speed at which conditions can change is staggering , which means algos must not only execute trades with precision , but also continuously assess and mitigate risk in real time . This leads to risk parameters — such as stoploss limits , position sizing , and exposure levels — needing to be dynamically adjusted based on the latest market data .
Moreover , the ability to source liquidity becomes more complex . Traditional methods of liquidity sourcing may no longer suffice in a market where liquidity can dry up in an instant . Modern algos must be equipped with sophisticated techniques to find and secure liquidity across multiple venues . This includes the ability to recognise and react to fragmented liquidity pools , where the best execution prices might be spread across various lit exchanges , dark pools and systematic internalisers ( SIs ).
In essence , algos need to be both hunters and gatherers , constantly seeking out the best opportunities while managing the impact of their trades on the market .
Algo strategies must also evolve in their execution style . In times of high volatility , the line between aggressive and passive execution strategies becomes blurred . The right execution style can mean the difference between a successful trade and a costly mistake . Adaptive algos must be able to switch seamlessly between different execution tactics based on real-time assessments of market conditions .
The recent market turbulence should serve as a wake-up call for the industry . The confluence of global events and central bank policies has created a new normal of frequent and intense market shocks . To succeed in this environment , financial institutions must invest in strong underlying trading infrastructure , refine their execution strategies , and remain agile in their approach .
The ability to navigate this volatility will be crucial not just for preserving capital , but for seizing opportunities in a market where uncertainty is the only certainty . Those who fail to adapt their algo trading strategies to this new era of volatility risk being left behind , while those who embrace change will be well-positioned to thrive .
Issue 81 // thetradenews . com // 95