THETRADETECH DAILY THE OFFICIAL NEWSPAPER OF TRADETECH 2024
Kendell James :
The importance of algo selection in achieving best execution
What should be prioritised when it comes to algo selection ? The are several key things I look for as it pertains to algo selection , first would be market access . Access to liquidity is key , algos that have access to the bulk of venues , exchanges and pools that we can have our orders exposed to is critical for optimal pricing . Second , would be historical benchmark slippage , as we target various benchmarks in our execution , staying in-line or outperforming the given benchmark is very advantageous to our overall objective as traders .
Third , would be impact balancing - all orders have different levels of urgency , with higher urgency orders potentially being the most impactful , you still want an algo that prioritises best price ( passive touch , midspread ) while achieving the desired volume / completion targets .
In your opinion , what is the best strategy when it comes to assessing algo performance ? I can ’ t say with confidence that there is a ‘ best ’ strategy , given the vast scope of the market and dynamic aspects of its structure . My personal preferred strategy of assessing algo performance would be a relative / peer assessment approach versus common benchmarks in similar order types and metrics .
What ’ s the biggest roadblock when it comes to algo adoption ? The biggest roadblock when it comes to algo adoption is broker differentiation . Algos are a great tool for equity execution , however , amongst the standard benchmarks and strategies such as VWAP , implementation shortfall ( IS ) or percentage of volume ( POV ), it can be a challenge to select the ‘ optimal ’ broker algo given the close similarities they
Multi asset trader at Federated Hermes , Kendell James , sits down with The TRADE to explore the increasing importance of algos in achieving best execution , unpacking what the market should be prioritising when it comes to algo selection , the biggest roadblocks to adoption , and how usage is evolving .
all possess . For example , targeting percentage of market volume , a pretty straightforward and achievable strategy , doesn ’ t normally see much deviation per broker across the normal evaluation metrics .
How is algo usage evolving ? I would say algo usage is evolving in two main ways : customisation and tech integration . Customisation in a sense that instead of a ‘ one size fits all ’ approach , to an industry with thousands of traders , both buy- and sell-side , executing a wide range of strategies , brokers are offering custom settings and tweaks that are best-fit for the given firm / user .
Secondly , there looks to be a big ramp in the tech integration space as algo offerings look to be more applicable and user-friendly for the various EMS and OMS . I have also seen providers leverage the abilities of addons and plug-ins for additional analysis and visibility on orders .
In The TRADE ' s recent algo survey , 45 % of buy-side traders reported using five or more providers , is this a surprising statistic ? Not extremely surprising – as a primary consideration of traders is the need to mitigate risk . With this , given developments , upgrades and occasional lapses and latency , having ample options helps preserve firm capital and minimises sunk costs in the presence of these issues .
As it pertains strictly to variability , it is somewhat surprising – as previously noted , providers ’ algo suites are normally very similar in offering . However , another perspective to counter that statement is that every incremental increase in liquidity exposure you can get , counts when trying to achieve best execution .
22 THETRADETECH DAILY