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Algorithm Overload

As buy-side trading desks are challenged to navigate increasingly complex markets, algorithm providers are responding with streamlined offerings and liquidity-seeking strategies.

See related sidebar: Citi's Response to Algo Fatigue

Sniper. Guerrilla. Dark Probe. Nighthawk. The names may imply urgency and aggressiveness (yet stealth), but the buy side may not be buying anymore. Inundated with algorithmic offerings over the past few years, buy-side trading desks seem to be shifting tactics and seeking a streamlined portfolio of algorithms.

Since black-box trading exploded onto the scene, buy-side traders have been bombarded with more and more algorithms with more- and more-creative names. And while before the market took a nosedive many buy-side trading desks might have been scrambling to secure access to as many different algorithm offerings as possible in order to cover all their bases and tap any available liquidity, today's economic conditions have rewritten the story.

Courtney McKenna, Vice President of Equity Trading, Iridian Asset Management
Courtney McKenna, Vice President of Equity Trading, Iridian Asset Management
The global financial crisis has changed trading (likely forever), and the buy side no longer can afford to be overloaded with algorithms that basically offer similar functionality. With market volatility at historic highs and buy-side trading desks shrinking, traders today must do more with less, and it's becoming harder and harder to keep up with the seemingly endless list of new algos. And as the algo market matures, traders are realizing that they don't need every single available algo or bell and whistle; instead, they'd rather work with fewer algorithms that work best for them.

According to Tim Reilly, managing director and head of electronic execution sales at Citi, long-only firms in particular have been hit hard by the economic downturn, resulting in cuts and consolidation across their trading desks. "There are so many choices out there for algos and it's difficult to navigate when you don't have 12 traders to try all of them out," he says. "Being able to create more efficiency and present a more intuitive workflow is a really important concept."

Tim Reilly, Managing Director and Head of Electronic Execution Sales, Citi
Tim Reilly, Managing Director and Head of Electronic Execution Sales, Citi
While the move to fewer, more-effective algorithms may have been inevitable, the market downturn certainly has accelerated the trend. In turn, algorithm providers are heeding the call and streamlining their algorithm suites in an effort to make them more appealing to the buy side.

A Cleaner, More Customized Algorithm Experience

"There is overkill in terms of the redundancies that are offered from one suite of algorithms to the other," says Courtney McKenna, vice president of equity trading at Iridian Asset Management. "It gets to the point where they're competing for the same trades and they're really not very different from each other."

According to McKenna, algo providers seem to be working to make their offerings and the user experience cleaner, or as she puts it, "sleeking them down." She adds that some providers may have taken their algo offerings too far and that "too many bells and whistles is almost a distraction."

Citi's Reilly agrees. "Algorithms are shifting to a more mature place in the equity trading market," he says. "And as that shift takes place, you find strategies or products that were less useful or less utilized by clients more easily integrated into existing strategies rather than rolling out the newest catchy name or phrase."

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