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strategy, based on a statistically
significant set of data and metrics.
Without that, every trade starts
looking like an outlier.”
Performance driven trading
The overriding concept has been
described as being smart routing
systems which look at all the op-
tions for trading a given asset, and
ensure best execution and prevent
trader bias.
Trader bias may have previously
skewed broker performance, but
the algo wheel allows for a larger
selection of brokers and even
provides a loop of feedback to
participating brokers. The under-
lying basis for the algo wheel is a
principal known as performance
driven trading.
“Performance driven trading
is about reducing the “noise”
and trader bias by focusing on a
reduced set of variables, such as
trading strategy, timeliness and risk
tolerance,” says Guy Warren, CEO
at ITRS Group. “By using your algo
wheel, or randomisation engine,
you are truly selecting brokers
based on performance metrics, and
therefore “best in class” based on
your trading parameters.”
FlexTrade takes this a step
further and adds intense analysis
to the mix. McGraw explains this
is at the foundation of FlexTrade’s
recently launched algo wheel.
“We like to use the term da-
ta-driven trading, which includes
both performance-driven trading
plus dynamic analyses. Historical
“Too many algo choices
is a problem if a firm
cannot efficiently
navigate through
them.”
RICH MCGRAW, SENIOR VICE
PRESIDENT, GLOBAL MULTI-ASSET
EMS/OMS SALES, FLEXTRADE
transac-
tion cost
analysis
(TCA) is at
the root of both
since it can reveal
how broker algos performed
versus orders with any charac-
teristics,” he adds.
Firms can create trading scenarios such as “VWAP
on small-cap names with 20% ADV”, or “Implemen-
tation Shortfall on mid-cap names with 10% ADV”
or any other conditions. Then TCA can rank how all
broker algos performed under similar scenarios,” he
explains.
Once this mapping is in place, a trader can random-
ly select algos with appropriate execution goals and
track performance against benchmarks, a step in the
right direction for proving best execution. Perfor-
mance can then be improved through predictive ana-
lytics like short-term forecasts or expected volumes,
to tweak limit prices and sizes on child orders.
But it’s not just best execution requirements the tool
can be utilised for. Algo wheels can be deployed for
the unbundling of execution and research, allowing
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