Algos: Human After All?

Michael Levas, founder, senior managing principal and director of trading at Olympian Group, says, “We as practitioners need to work with the regulators in a conducive fashion,” he says. “Effectively, they are doing the right thing for the marketplace, for the traders and for the end-investors.”

A Natural Return
In essence, there is nothing new about algorithmic trading, according to Intalus’ Kahler. It merely represents a return to trading practices of yore.

“Algorithmic trading is just trading in its natural form,” he says. “The best survive; the others pay the bill. No money is made on the market; it’s just redistributed. Spectacular failures of algorithms have shown that speed and computerized algorithms cannot guarantee alpha generation.”

The challenge for firms engaged in algorithmic trading is to differentiate themselves from the rest of the pack. Of course, this is easier said than done, but a good start, according to Object Trading’s Turner, is to look beyond the realm of VWAP and time-weighted average price (TWAP) algos.

“Everybody has algos,” he says. “They are pretty ubiquitous across the market, but they’re all trying to cover the same bases, get the best arrival price—the usual TWAPs and VWAPs out there, which most firms have. Algos nowadays must be more adaptive about the sentiment of the market. Liquidity is not as readily available as it has been, so algos have got to be a little bit smarter about how they approach the market and react to market movements and market sentiment.”

Olympian Group’s Levas says, “There are between five and 10 algorithms that everybody has and they are basically the same,” he says. “The key to any firm on the buy side is to differentiate themselves and be able to have something that investors will want and be able to go after, so without question, finding new algorithms is something they’ll definitely want to do.”

The Next Step
For ConvergEx’s Capuzzi, a successful algorithm is one that can provide access to the most liquidity, which is made all the more challenging given the fragmentation of the markets over the past few years.

“The game today is how much you can get your arms around in terms of lit and dark liquidity and how you can access that in the most efficient way from a performance standpoint,” he says. “How can you access that liquidity in the most intelligent way?”

In Europe, he points to ConvergEx’s creation of dark aggregation tools to make algorithms able to cope with the many and various dark pools across the continent. For this reason, he says, clients have to split up their orders to access multiple dark pools and then manage each one of those orders themselves.

Again, this is easier said than done, but he says firms that can provide dark liquidity as part of a standard algorithm or as part of a dark-only strategy will lead the way as firms battle to find the next new thing.