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The sheer number of different algorithms in circulation
makes selection, performance measurement, and
broker feedback difficult. So how are the buy-side
opting the right algos? Asks Sarfraz Thind
E
quity execution can be a
tricky business. Countering
predatory traders has been a
concern for the buy-side ever since
the market became electronic some
15 years ago. Participants have
devised many ways of stopping the
threat but the problem of informa-
tion leakage and trade disruption
has not disappeared. With MiFID
II putting greater emphasis on best
execution, algorithms need to be in
better shape than ever before.
So what can the industry do to
improve this side of the business?
Buy-siders have certainly ramped
up their algorithmic sophistica-
tion since rudimentary execution
algorithms came into the market
in the early 2000s. And there is
no shortage of them out there—
indeed, according to estimates,
there are some 1600 algorithms
currently available to buy-siders
globally, incorporating anything
from volume prediction analytics,
market impact models to liquidity
heat maps and venue analytics. The
sheer numbers of these different
algorithms makes selection, perfor-
mance measurement, and broker
feedback difficult. And this has led
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TheTrade
Summer 2017
to some dissatisfaction. In a report
published by Greenwich Associates
in January just 7% of US buy-side
institutions said they were happy
with the standard broker algo-
rithms. Furthermore participants
say that the variation in the per-
formance of different algorithms
remains small.
for 10% of market volume, part
of around 10 standard algorithms
the bank runs. These will perform
standard execution functions well
but may still need to be managed
according to conditions.
“You need to randomise your
algos—you don’t want to give
participants the score of your
“You need to randomise your algos—you don’t
want to give participants the score of your music.”
MICHEL KUREK, HEAD OF QUANTITATIVE, CASH EXECUTION, SOCIÉTÉ GÉNÉRALE
At present the industry continues
with a heavy use of traditional al-
gorithms to handle its liquid equity
execution. The likes of VWAP
(volume weighted average price) or
participation algorithms are partic-
ularly prevalent and have, generally
speaking, proven adequate to han-
dle large orders on liquid equities.
Michel Kurek, head of quantita-
tive – cash execution at Société
Générale, says that VWAP accounts
for one-third of all global algorithm
orders currently undertaken by
Societe Generale with participa-
tion algorithms second, accounting
music,” says Kurek. “If you do some
counterparty will be able to game
your note.”
Forensic analysis
Greater pressure is likely to occur
on algorithms when they are
tasked with executing trades in less
liquid names.
“We rigorously benchmark
different algos and analyse them
quite forensically—we don’t have
any complaints from the ones we
use,” says Michael Horan, head of
trading services at BNY Mellon
Pershing. “You get potential dumb