Algorithms Where do we (and you) go from here?

Jon Carp, Head of Alternative Execution Sales Europe at CA Cheuvreux

While this list is far from exhaustive, it serves to make the point that the business of providing and continually developing algorithms that match and ideally outperform competitors is a very expensive and time consuming one. The cost means that only a select few of the sell-side community can develop and provide their own algorithms for client use. But having attained clients, will the rewards be profitable in the longer term?

The answer, of course, is not straightforward. At CA Cheuvreux we have developed and continue to develop a suite of algorithms that perform well. These are used internally by our own agency traders and programme desk, and have been developed further to satisfy client requirements. However, algorithms should not be viewed in isolation, but as part of a complete service offering. Experience has shown that very few, if any, of the buy-side use algorithms as their only method of trading. Direct market access and programmes continue to rise in usage. Orders that require sell-side traders to utilise their specialist knowledge of local markets have not, despite what some will lead us to believe, gone away. To maximise returns on developments in trading techniques, a complete product set should be offered to clients. In many cases, we have won a client because we have the entire suite. Feedback from our client base has shown that although some only require a singular service, others assert that to only offer DMA is insufficient, likewise for algorithms, programme trading and telephone execution. By offering all services, with no gaps, client attainment and retention is far greater than it would otherwise be

By no means is CA Cheuvreux the only company to offer a multitude of trade execution services. Indeed, providers of algorithms generally offer a suite of the same eight or so basic strategies (i.e. VWAP, TWAP, % Volume etc.), with perhaps one or more developed to distinguish their offering. But if the basic strategies are the same, then there is almost too much choice for the user. We have found that it is common for buy-side traders to use, on average, three algo sell-side providers with upwards of five providers not uncommon. This is maybe due to the increased use of algos to pay for research services, unbundling and as the use of electronic trading methodologies continues to gain favour. So, if a fund has five providers each providing ten general strategies, it has a selection of 50 general strategies to chose from, each with their nuances. In addition, it has the individual providers’ 'specialist' algorithms to choose from as well. ...

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