Predictive Analytics Arms the Buy Side Against HFT

Buy-side traders can use streaming data on stocks to capture short-term alpha and avoid adverse selection, says Pipeline's Henri Waelbroeck.

Buy side traders are making execution strategy choices, all the time. While deciding to trade a stock more aggressively or more slowly, they are protecting their orders against predatory order flow as well. Earlier this month, Pipeline Trading Systems LLC released a streaming analytics tool to help institutional traders take direct control over their execution strategy. Advanced Trading's Editor-at-Large Ivy Schmerken spoke with Henri Waelbroeck, Pipeline's Director of Research, about predictive analytics and how they can help the buy-side increase intraday alpha capture while minimizing adverse selection.

What does AlphaPro offer to the institutional trader?

Henri Waelbroeck, Director of Research at Pipeline Trading Systems: Pipeline has pioneered a new concept of man-machine interface that aims to enable the trader to first understand the factors that are driving alpha, then implement an informed strategy choice based on those factors, and finally take control of the execution schedule. This is the first system that provides streaming analytic capability in real time, together with the factors that we find are driving short-term alpha.

Why is this approach of value to the buy side?

Waelbroeck: Traders don't like the fact that most execution platforms today are a black box. They want to understand what's going on. They have other sources of information: news, data feeds, and international events. They may also have instructions from the portfolio manager. They form an opinion drawing from this information; if that opinion is different from the alpha profile produced by a quantitative system, the trader needs to be able to see the factors that drive the quantitative analysis to reconcile the two viewpoints.

So, a black box would tell them this is a high urgency trade, but it's not going to tell them why. Without knowing why the black box is recommending urgency, it's impossible for the trader understand how to incorporate this information into their own thinking and take control of the execution.

How is this different from the alpha profiling work that Pipeline was previously working on with specific portfolio managers?

Waelbroeck: With our original offering, we developed a methodology that enables us to look at an order as it arrives on the OMS and determine the urgency of the trade - whether the stock is going to move up or down from there - and assign it to an execution strategy. In that original offering, we needed two-or-three years of historical data from the portfolio manager. With this real-time system we have made the technology available to all Pipeline clients essentially by deploying an enhanced user interface that enables them to place an order and get back an alpha profile using over 40 drivers that are available in the trading service. The order would be classified by urgency, and assigned to a strategy that is customized to the specific alpha profile.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio