Trading Technology

03:10 PM
Kerry Massaro
Kerry Massaro
Commentary
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After a Lull, Algo Innovation Set to Heat Up in 2010

Algorithm news may have seemed to quiet down, but many firms have been working hard behind the scenes, and now they are ready to make big changes this year.

Lately I started to think that there was no real, worthwhile news in the algorithmic trading space. Buy-side traders seemed to be humming along happily with their favorite algo suites, not looking out for anything new. In fact, most buy-side traders had said they were pairing down their algo toolbox and focusing on the handful of algos that performed best for their strategies. Were algorithms becoming commoditized? Did it make a difference which stealth or VWAP algo a buy-side trader used? Would there be anything new to report in this space in the coming year, or should Advanced Trading switch its focus to newer innovations?

Well, things may have been a bit quiet for a while, but they're about to start heating up again. I started doing some research for our upcoming digital issue on algorithmic trading (which will be available for free download in mid-February at advancedtrading.com/digital-edition), and I realized that while the past few years have been seemingly quiet in this space, there's been a lot of innovative work going on behind the scenes -- most of which has been around niche strategies or areas in which buy-siders have been experiencing frustration.

For example, in an interview with Knight Capital managing director Joe Wald during the first week of January, I found out that he and his counterparts in the firm's technology organization have been working on a solution for pairs trading. By February Knight Capital will have released a new way to trade pairs electronically -- built into Knight Direct -- as well as four new algorithms matched to different pairs strategies. According to Wald, pairs trading has been a pain point for traders for a long time, and Knight's innovation should increase the likelihood of getting pairs executed, as well as increase the volume of pairs traded.

In addition, RBC Capital Markets (check out exclusive photos of the firm's new trading floor) is relaunching its suite of algorithms after overhauling its trading desk and trading tools over the past year. For now the firm is being coy about the specifics around the algorithms, waiting to provide details until later this year when it rolls out the new trading products. But hopefully Advanced Trading will have more details for you in our digital issue. (If not, keep checking back, as we'll certainly follow the story.) And in related algo news, Instinet says it's been focusing on algorithms around multi-asset trading, which we'll also report on more closely in our February digital issue.

From the credit crisis and the economic slump to scandals and the focus on regulation, the past few years have been difficult for the industry. And 2010 undoubtedly will be remembered as a year defined by new regulatory oversight and market adjustments (see our coverage on dark pool regulation, and derivatives reform). But 2010 also will be a year in which we will start to see the fruits of the innovative work that has been going on during these tough years behind the scenes. And innovations in algorithms are just the beginning. Here's to a prosperous 2010!

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