Forefront Communications

Best Execution: Buyside Focus – Bespoke Algos

Amanda Perrucci

Amanda Perrucci

Best Execution’s Chris Hall speaks with James Doherty, Dash’s Head of Equity Product, and more on whether brokers can tailor their models to meet customisation demand.

Responding quickly and effectively to client customisation requests is now a base level requirement for today’s execution brokers. According to a Greenwich Associates survey last year, brokers expect almost half of their buyside clients to seek some kind of customisation of order-handling logic during 2019, versus just over a quarter in 2017.

The powerful forces propelling demand for customisation suggest differentiated execution services will only become more important, undermining business models that fail to invest in top-tier capabilities.

“Where they once could simply offer a best-of-breed algo suite, brokers today must also provide a service tailored to the specific requirements and trading styles of their customers,” wrote Richard Johnson, vice president in Greenwich’s market structure and technology practice, adding: “Providing customised algorithms is now a prerequisite for a competitive e-trading offering.”

Client service in general, and algorithm customisation in particular, are becoming more critical as competitive pressures intensify on the buyside. Low-cost alternatives are driving margin compression and a stronger emphasis among active managers on scalability and automation across functions, including trading. Buyside traders told Greenwich they expect electronic trading to account for almost half of US and European equity trading flow within three years, with Asian volumes also surging.

James Doherty, head of equity product at Dash Financial Technologies, says dark liquidity cannot be ignored. “But you can manage the information leakage arising from pursuit of liquidity. Buyside firms are measuring performance much more precisely and are highly focused on identifying and refining tactics to optimise outcomes, i.e. how and when to split orders across venues.”

This is leading to greater popularity of ‘I would’ functionality, for example, which allows traders to capture liquidity on additional venues, whilst working the lion’s share of a large order on a block-friendly platform.

“Investors are willing to take the opportunity to grab liquidity wherever it arises, but they are also using pre-trade analytics to get a better idea of what it might cost them,” says Doherty. “It’s now possible to detect patterns that might only last a few seconds, which still may be sufficient for an algo to capture much-needed liquidity.”

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