September 20, 2012

What is the testing procedure inside a major sell-side firm for a new algorithm? Dan Nachtman, director of global execution services at Bank of America Merrill Lynch, describes how the firm tests its trading formulas before making them available to the buy side:

"Testing follows a multistep routine. Test plans are created by a collective group that includes staff from the business, technology and quality assurance groups. The algo is unit tested with a specific focus on the new features.

[Can Buy Side Traders Trust Their Brokers' Algos?]

"The next testing step is run as a series of automated tests and uses cases that can number in the thousands. This ensures that the new functionality has not compromised preexisting logic. When testing is complete, the algo is rolled out to an isolated beta instance where selected orders can be directed through the new algo or functionality. With verified success, additional flow is routed through the beta instance.

"After sufficient analysis of performance, a step-by-step process is initiated to roll out the algo to the production plant. This can take two to five days or more depending on the complexity of the change."

Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining ...