Playing It Safe

Cultural behavior and upbringing influence how people react in similar situations. Take, for example, how Chinese takeaway noodles are often portrayed on TV or in films. The person eating will often leave the chopsticks standing upright in the noodles. In many Asian cultures, this is a big no-no, as leaving them standing vertically symbolizes death, as though placing incense at the altar during a funeral. This serves as a reminder—albeit somewhat morbid—that things are often portrayed and done differently in different cultures. Trading is no different. 

In a recent discussion with Scott Kartinen, head of algorithms and Stuart Thompson, head of execution and quantitative services for Asia-Pacific at Liquidnet, we spoke about how certain algos are more popular among Asian traders compared with their counterparts in the US and in Europe. 

This conversation stemmed from Liquidnet upgrading its algos. It is looking to launch the enhanced version of its volume-weighted average price (VWAP) algo in Asia due to the higher demand and interest for it in the region. VWAP is a trading strategy that balances execution with volume. 

“Traditionally, things would generally migrate from the US, to Europe and then to Asia. But we’ve started to flip that model around,” he said. “There’s a lot more VWAP trading that goes on in Asia than other markets so it might make sense for us to start here because there’s a bigger appetite for VWAP trading [strategies].”

Thomspon said about 46 percent of total algo flow in the region is VWAP-based, on the electronic trading side. In the US, it is about half of that. “It’s a risk-averse strategy,” he said. “It’s culturally dependent. If you look at Japan and Hong Kong, it’s a traditional way of trading and ultimately it’s a safe way of trading on an overnight basis. So you have your European traders or US overnight traders who are not looking to take your risk because they are not able to visualize and look at the trade live. They want to hand it off to a trading desk and ask to work VWAP because there’s not going to be too much deviation from the VWAP price, whether it’s plus or minus ‘x’ basis points. So you’ll never be greatly skewed and it provides a level of comfort to the portfolio manager and the overnight trader,” he said. 

The next most used trading strategy in Asia is the percent-of-volume or POV strategy, at between 20 to 25 percent, while the remainder consists of implementation shortfall, or dark aggregator strategies. 

Liquidnet aims to pilot the new version of its VWAP algo in the second quarter of 2019. It will incorporate some of the analytic models that Liquidnet owns via its acquisition of OTAS Technologies. 

Liquidnet is currently testing and tuning a number of different signals to see which ones are best at determining when is a good time to trade, or slow down. “If you’re going to deviate from a VWAP curve, you need a signal that’s going to be consistently giving you good advice for when you should deviate and when you should not. It’s all about tuning those signals and testing them and making sure they work both in and out of sample, so when you put it into production it’ll give a consistent result,” Kartinen said. 

Liquidnet also plans to rebuild its algo infrastructure from scratch. Kartinen said one of the benefits of building a container—where Liquidnet stores and builds its algos—in-house is that it will be able to customize and change configurations to the infrastructure to control what the algo is able to do. 

“If there are certain things we want the algo to do, [currently] we don’t control every piece of the algo infrastructure. If we want to make a change to the way the algo behaves in certain cases, or we want to use a different type of model or piece of data we may in certain cases have to rely on the algo container provider to make changes so that we can ingest what we want from a particular model or a particular piece of infrastructure,” he said.