With New Tie-Up, QB Doubles Down Screen Exposure Hunt as TT Jumps Into Agency Algo Space

At its highest level, algorithmic best execution is something of a counterintuitive business.

White-labling generic algos is an easy way to get started—and sure enough, there are certainly enough cheap options to choose from, many of them from the banks.

Shops really focusing exclusively on best ex and slippage costs, however—and particularly those working in futures, rates and other non-equities asset classes—make a name for themselves by getting in the weeds, customizing to clients' trading style, and measuring performance with advanced applied mathematics. For that reason among others, there are but a few of them.

As Robert Almgren, co-founder and president at Quantitative Brokers, says, it's more about spending dedicated time "under the hood" than raising profile.

To the Desktop
For successful firms like QB, though, this is also a posture naturally and inevitably outgrown. The next step, Almgren says, is to either invest significantly in building a front-end presence, or secure one that makes sense. Trading Technologies (TT) was the choice.

Everyone claims they're 'best ex' and that's fine with us. The competition then comes back down to performance, and that's the way we've done things for years and years. An algo with sophisticated logic won't be correct 100 percent, all the time, but if it's correct 55 percent of the time, that might result in improved execution above what you're doing otherwise. It all comes down to average best performance. It's a game of statistics.

"The clients we started out with in 2008 were commodity trading advisors (CTAs), who generally had their own algo team," he tells Buy-Side Technology. "We could talk to them, talk about why their algo is better than ours or vice versa, and go head-to-head on performance. They were all over it. All of this would happen via FIX-spec messaging, and therefore we had zero screen interface."

Fast forward to today, and QB's needs are suddenly very different. "We're hitting more traditional traders now, for whom we have to pitch on the concept of an algo, plus provide an easy way to get orders into the system," Almgren continues. "That includes hedge funds, asset managers, and the broader set of CTAs that vary in their technical sophistication, too—there are a lot of smart guys out there who don't know anything about algos. So, with this move, we're actually moving toward the traditional desktop now."

Symbiotic
All four of QB's algo strategies will be on offer at TT: Bolt, which targets arrival price; Strobe, which hits time and volume weighted average price (TWAP and VWAP); the multi-product, multi-exchange Legger, which can play off abritrary numbers of exchanges against each other, such as CME versus Eurex versus Liffe versus cash treasuries; and finally the Roll algo, a specific iteration of the Legger used for slightly different purposes by the market.

The partnership is symbiotic, in that TT's massive desktop presence hasn't historically included agency-provided algorithms.

The Chicago-based software giant is now pulling together a new framework for algos focused on futures and fixed income after about a year's work. QB was an obvious partner to pilot the project, according to TT's director of product development Drew Shields.

"Our hedge fund clients have been asking for access to QB for some time," he explains. "We have designed our new framework to be flexible and open—and have adopted standards such as FIX ATDL to that end—so that we can have it more effectively evolve with our clients’ needs. Initially, this means integrating with third parties so that the front-end experience is consistent with TT's futures execution. In the long run, we expect the open nature of the platform to democratize execution algos, in the same way ADL [algo design lab] has done for latency-sensitive proprietary algorithms."

Well-Rounded
Specifically, Shields imagines benefits for TT's 'yield' trading tools—which are part of the X-Trader product suite now and will soon be part of the revamped TT platform later this year—as well as the new aggregation functionality currently being releasing as part of both platforms.

"By combining yield with best-in-class algo partners such as QB, we believe we are offering the most well-rounded analytics, pricing, and execution platform for cash and futures fixed income traders," he says. "Users of the new TT will soon be able to view markets and trade in yield yet execute those trades through QB. For example, their Strobe algo would allow a TT user to TWAP or VWAP yield, rather than price."

For his part, Almgren also sees advantage for QB in covering a number of different client bases as part of its broader screen exposure strategy.

"At TT, they're basically point-and-click," he explains. "TT have their MD Trader ladder, they can do pegging orders and construct spreads, but that's a far cry from the 'sky's the limit', multi-exchange risk legging we do by examining signals. Our core love and focus has always been interest rate products and energy, doing multi-leg trades across a crude oil complex, for example, and it's really determined by customer demand. This is also a great complement to the recent deal we did with RiskVal. They're big in the niche, fixed income basis-trading space, whereas TT really has broad coverage."

Improved Visibility
Almgren doesn't expect QB to limit its screen distribution to TT, and likewise, a handful of other best ex algos will join QB in the new framework over time.

"TT probably has the biggest footprint in terms of screen trading, but this isn't meant to be exclusive," he says. "We've tended to be a little too under-the-hood until now, operating with no visibility. For six years we've just said 'send us a FIX message, we'll send you back numbers', so we need to get our algos out to more people, and anyone on a desktop we're happy to work with."

As for being one option among many, Almgren says that's something QB welcomes.

"At this point, everyone claims they're 'best ex' and that's fine with us. The competition then comes back down to performance, and that's the way we've done things for years and years. An algo with sophisticated logic won't be correct 100 percent, all the time, but if it's correct 55 percent of the time, that might result in improved execution above what you're doing otherwise. It all comes down to average best performance," he says. "It's a game of statistics."

And increasingly, one QB is willing to play on a wider stage.

Bottom Line

• Algo specialists and screen providers like QB and TT are well-suited to partnerships due to their converse priorities: depth of knowledge on one hand and size of footprint on the other.

• The move is the second interface deal QB has done in 2015, with a recent tie-up with RiskVal directed more at sell-side shops focused on basis trading in fixed income.