Saturday 6th February 2016
NEWS TICKER: Friday, February 5th: According to Reuters, Venezuela's central bank has begun negotiations with Deutsche Bank AG to carry out gold swaps to improve the liquidity of its foreign reserves as it faces debt payments of some $9.5bn this year. Around 64% of Venezuela's $15.4bn reserves are held in gold bars, which in this fluid market impedes the central bank's ability to mobilise hard currency for imports or debt service. We called the central bank to confirm the story, but press spokesmen would not comment - The Hong Kong Monetary Authority (HKMA) says official foreign currency reserves stood at $357bn (equivalent to seven times the currency in circulation or 48% of Hong Kong M3) as at the end of January, down compared with reserve assets of $358.8bn in December. There were no unsettled foreign exchange contracts at month end (end-December: $0.1bn) - BNP Paribas today set out plans to cut investment banking costs by 12% by 2019 to bolster profitability and reassure investors about the quality of its capital buffers. The bank is the latest in a line of leading financial institutions, including Credit Suisse, Barclays and Deutsche Bank which look to be moving away from capital intensive activities. BNP Paribas has been selling non-core assets and cutting back on operations including oil and gas financing for the last few years as it looks to achieve a target of 10% return on equity. Last year the bank announced a €900m write-down on its BNL unit in Italy, which pushed down Q4 net income down 51.7% to €665m - Johannesburg Stock Exchange (JSE)-listed tech company, Huge Group, will move its listing from the Alternative Exchange (AltX) to the JSE main board on March 1st - Moody's says it has assigned Aaa backed senior unsecured local-currency ratings to a drawdown under export credit provider Oesterreichische Kontrollbank's (OKB) (P)Aaa-rated backed senior unsecured MTN program. The outlook is negative in line with the negative outlook assigned to the Aaa ratings of the Republic of Austria, which guarantees OKB’s liabilities under the Austrian Export Financing Guarantees Act – As the first phase of talks between Greece and its creditors draws to an end, International Monetary Fund chief Christine Lagarde stressed to journalists in Greece that debt relief is as important as the reforms that creditors are demanding, notably of the pension system. "I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side." Greece's pension system must become sustainable irrespective of any debt relief that creditors may decide to provide, Lagarde said, adding that 10% of gross domestic product into financing the pension system, compared to an average of 2.5% in the EU, is not sustainable. She called for "short-term measures that will make it sustainable in the long term,” but did not outline what those measures might be. According to Eurobank in Athens, IMF mission heads reportedly met this morning with the Minister of Labour, Social Insurance and Social Solidarity, Georgios Katrougalos, before the team is scheduled to leave Athens today. According to the local press, it appears that differences exist between the Greek government and official creditors on the planned overhaul of the social security pension system. Provided that things go as planned, the heads are reportedly expected to return by mid-February with a view to completing the review by month end, or at worst early March. In its Winter 2016 Economic Forecast published yesterday, the European Commission revised higher Greece’s GDP growth forecast for 2015 and 2016 to 0.0% and -0.7%, respectively, from -1.4% and 1.-3% previously - Fitch says that The Bank of Italy's (BoI) recent designation of three banks as 'other systemically important institutions' (O-SIIs) has no impact on its ratings of the relevant mortgage covered bond (Obbligazioni Bancarie Garantite or OBG) programmes. Last month, BoI identified UniCredit, Intesa Sanpaolo. and Banca Monte dei Paschi di Siena as Italian O-SIIs. Banco Popolare and Mediobanca have not been designated O-SIIs. This status is the equivalent of domestic systemically important bank status under EU legislation. Fitch rates two OBG programmes issued by UC and one issued by BMPS, which incorporates a one-notch Issuer Default Rating (IDR) uplift above the banks' IDRs. The uplift can be assigned if covered bonds are exempt from bail-in, as is the case with OBG programmes under Italy's resolution regime and in this instance takes account of the issuers' importance in the Italian banking sector – Meantime, according to local press reports, Italian hotel group Bauer and special opportunity fund Blue Skye Investment Group report they have completed the rescheduling and refinancing of Bauer’s €110m debt through the issue of new bonds and the sale of non-core assets, such as the farming business Aziende Agricole Bennati, whose sale has already been agreed, the Palladio Hotel & Spa and a luxury residence Villa F in Venice’s Giudecca island – Meantime, Russian coal and steel producer Mechel has also agreed a restructuring of its debt with credits after two intense years of talks. The mining company, is controlled by businessman Igor Zyuzin - Asian markets had a mixed day, coming under pressure. Dollar strengthening worries investors in Asia; from today’s trading it looks like dollar weakening does as well. Actually, that’s not the issue, the dollar has appreciated steadily over the last year as buyers anticipated Fed tightening; but it has hurt US exports and that has contributed to investor nervousness over the past few weeks, which is why everyone is hanging on today’s The nonfarm payrolls report, a bellwether of change – good or bad in the American economic outlook. Back to Asia. The Nikkei 225 ended the day at 16819.15, down 225.40 points, or 1.32%; and as the stock market fell the yen continued to strengthen. The Nikkei has shed 5.85% this week. The dollar-yen pair fell to the 116-handle, at 116.82 in afternoon trade; earlier this week, the pair was trading above 120. It is a hard lesson for the central bank, whose efforts to take the heat out of the yen by introducing negative interest rates has done nothing of the sort. Australia's ASX 200 closed down 4.15 points, or 0.08% after something of a mixed week. The index closed at 4976.20, with the financial sector taking most of the heat today, with the sector down 0.7%. In contrast, energy and materials sectors finished in positive territory, buoyed by gains in commodities. The Hang Seng Index closed at 19288.17, up 105.08 points (or 0.55%) while the Shanghai Composite was down 0.61%. down 17.07 points to 2763.95. The Shenzhen composite dropped 20.36 points (1.15%) to 1750.70, while the Kospi rose marginally by 0.08% to 1917.79. Today is the last day of trading on the Chinese exchanges for a week.

Latest Video

ALGO trading: a moveable feast Photograph © Robertds/Dreamstime.com, supplied March 2013.

ALGO trading: a moveable feast

Tuesday, 19 March 2013
ALGO trading: a moveable feast Algorithms have come a long way since the early days when traders used simple volume weighted average price (VWAP) routines to facilitate execution in large cap stocks. Technology has helped, of course; computers can now process so much data in near real time that programmers can incorporate feedback from the market to alter the way algorithms execute or route orders on the fly. Attitudes toward algorithms have evolved, too. Any lingering reservations—not uncommon among old-school traders—about how algorithms might perform during market dislocations were put to rest during the 2008/09 financial crisis. Today’s trading tools are smarter and more flexible than ever—and so are the users. Neil A O’Hara reports. http://www.ftseglobalmarkets.com/media/k2/items/cache/f8c1ec925a18c92698c05bff8c327469_XL.jpg

Algorithms have come a long way since the early days when traders used simple volume weighted average price (VWAP) routines to facilitate execution in large cap stocks. Technology has helped, of course; computers can now process so much data in near real time that programmers can incorporate feedback from the market to alter the way algorithms execute or route orders on the fly. Attitudes toward algorithms have evolved, too. Any lingering reservations—not uncommon among old-school traders—about how algorithms might perform during market dislocations were put to rest during the 2008/09 financial crisis. Today’s trading tools are smarter and more flexible than ever—and so are the users. Neil A O’Hara reports.

The proportion of trades now executed by algorithms is a movable feast depending on who is asked. A buy side desk may say it uses algorithms for 30% of its trading, counting only the orders it handles using direct market access or other electronic broker pipes. The other 70% of orders are called in to brokers, where the sell side trading desk will likely enter the flow into algorithms for execution. “Most US equity trading now uses some sort of algorithm,” says Scott Daspin, a managing director in the global execution group at ConvergEx. “The average block size continues to fall and appropriate execution requires a trading tool.”


Growing confidence in algorithms has encouraged buy side traders to exploit more complex routines. While some players still rely primarily on VWAP—quantitative shops doing mass optimisations of market neutral trades, for example—this long-time favourite has given way to implementation shortfall routines designed to minimize market impact. Traders specify the degree of urgency and the algorithm tries to optimise execution within that time frame. Based on measures of liquidity in the name and where the liquidity is concentrated, the algorithm will select the best routing among venues and decide whether and when to cross the spread to obtain a fill. “Clients are moving toward implementation shortfall as their primary benchmark,” says Daspin.




Average investment holding periods have come down in recent years, which has reinforced the focus on implementation shortfall. The shorter the time horizon, the more market impact costs affect the expected return on the trade. If a portfolio manager expects a 5%-10% uptick in price from a positive earnings announcement next week, the difference between 50 basis points (bps) and 150bps in market impact matters more than for a stock expected to rise 30% over two years.


For sensitive trades that are not urgent, traders may prefer a dark aggregator algorithm designed to tap liquidity only in dark pools where the footprint of a large order is harder to detect. Some dark pools are darker than others, and some admit participants whose activities may be toxic to large orders so traders can exclude certain venues or order types on a particular venue. Jeffrey Bacidore, head of algorithmic trading at ITG, has seen attitudes toward dark aggregators evolve, too. At first, traders would designate where they were and were not willing to trade, but now they take a more nuanced approach. “Shutting a dark pool out completely means there is absolutely no liquidity in there a trader ever wants to participate in,” he says. “That can’t be true.”


ITG and other providers have built more sophisticated algorithms that expose bigger size in clean pools but still show some interest, albeit with stronger safeguards against gaming, in more suspect pools. The buy side does not have the resources to monitor every venue in detail, which has led firms to lean on brokers to deliver an acceptable end result. “Brokers have to justify their decisions and provide good performance,” says Bacidore. “Clients find it hard to stay on top of the landscape. They have outsourced that to brokers and hold us accountable.”


The buy side learned long ago that while brokers always claim to put clients’ interests first a broker’s own interests will take priority if the client suffers no harm, at least in theory. In the spirit of “trust, but verify” the buy side is demanding more transparency about how algorithms route orders and where they are filled. Convergex has just opened its kimono through a Web portal on which clients who enter a ticker symbol and size can see a forecast of the expected market impact, how long it will take to complete the order, where the trade will route and where fills are expected. When clients enter a live order, they can see in real time where the order goes and the fills come from.


“When we demo this technology to people we don’t know, they fall off their chairs,” says Daspin. “We can practically see them reaching for the phone to ask their existing brokers how orders are routed.”


The degree of transparency ConvergEx offers allows buy side traders to tweak their execution strategy based on hard data about which venues give the best fills in a name. Sometimes it requires just a change in the parameters entered into the algorithm, but Convergex will customise the algorithm if need be. “The beauty of transparency is that people can make the algorithm exactly what they want, which is not the same thing for everyone,” says Gary Ardell, head of financial engineering and advanced trading solutions at ConvergEx.“Transparency helps clients get the right tool for the right job.”


The heightened transparency may tax the capacity of some buy side shops to make good use of it, however. Paul Daley, head of product development at SunGard’s Fox River Execution Solutions, says many clients struggle with the sheer volume of data generated in the full routing disclosure his firm provides and prefer to rely on monthly summaries instead. The snag? The summaries only includes trades done through Fox River, so users cannot compare the results with trades done through other brokers who do not offer similar transparency.


Clients who use the complete data dump can see where orders went, whether they were ever routed from one venue to another, how they were executed and whether they took or provided liquidity. “Over time, people are getting more into the logic of why a broker went to a particular venue, not just where it went,” says Daley. “People will use the tools and get their hands around the data.” He expects buy side trading desks to hire quantitative analysts with a grasp of trading who can use their programming skills to mine the data and suggest improvements in how the desk interacts with the market.


The buy side trader’s role continues to evolve from the jumped-up order clerk of yore toward equal partnership in the investment process. Traders don’t have to watch the market all the time any more; they can focus on higher value-added tasks like picking the best execution strategy and leave implementation to the machines. “A human does not have to look at the screen, see the bid move up a penny and decide whether to cancel and resubmit the order,” says Bacidore at ITG. “The algorithm has already done that if it makes sense. The trader looks at the objective and works more closely with the portfolio manager behind the trade.”


The nature of product development for algorithms has changed, too. Ten years ago, Bacidore says the main concern was to ensure the routines were robust and would not break down or go haywire. Today, those safeguards are a given and developers spend more time figuring out how to source liquidity as efficiently as possible. They also know other technology-savvy market participants like high frequency traders will try to reverse engineer or game their designs, a constant threat to buy side clients. “We have to have cutting edge technology,” says Bacidore. “We must be as smart and efficient as the best people in the market if we are to deliver good results to our clients.”


While technical improvements in single name algorithms will continue, the bigger challenge is to perfect algorithms that can handle baskets of stocks. It’s a daunting task: not only must the algorithm process data on all the individual names but the trading in one name affects how other names are traded. In a market neutral (equal dollar amounts to buy and sell) basket of 1,000 names, for example, the algorithm must maintain balance so that buys and sells don’t run too far out of whack. “The algorithm takes into account portfolio level objectives and constraints,” says Bacidore. “It comes at a cost, though—they can’t be too dynamic.” If a block showed up in an illiquid name on an institutional dark pool, a human trader might grab it but the algorithm might not because a large fill would unbalance the basket.


Another difficulty is the lack of industry consensus about how basket algorithms should work. The objective is clear: to minimize risk and maximize return on the trade—but opinions differ over what that means in practice. The uncertainty has hampered development efforts, according to Daley. Fox River could build an algorithm that made sense to its developers but if clients reject the logic it would be wasted effort. “We all agree what a VWAP algorithm is,” says Daley, “but we don’t necessarily agree what a basket algorithm is. There is a tremendous amount of unsatisfied demand in that space.”

Current Issue

Related News

Related Articles

Related Blogs