May 25, 2006

How do you manage this rapidly evolving trading capability?

Navigating the challenges outlined above involves a significant commitment in time and energy. The process should be thought of as a marathon, not a sprint. The steps outlined in this section will let you proceed in a structured way and make demonstrable progress in a short period of time.

1. Recognize the unrealized potential - just being connected to automated trading venues and using basic VWAP algos for cash equities is not enough. This unrealized potential can best be understood through quick internal and external scans.

- Internal. Buy-side trading management should conduct rapid assessments with key traders on their current use, desired use and gaps in training.

- External. The buy side has rich connections to peer buy-side organizations as well as sell-side constituents - focused conversations with these contacts regarding their experiences and growth plans for algo trading will bring to light potential areas for expansion.

2. Develop a structured approach to breaking down the challenges into parts:

- Strategic issue resolution. The quickest way to resolve these issues is to form a small team of experts and have them build a few concrete scenarios in a "war room" setting - pick one priority scenario and have the goals and tactics for that scenario drive downstream planning of algo, vendor and technology selection.

- Algorithm selection. The key for this step is to develop a simple mapping of trading goals to algo type - trading goals will vary by portfolio manager needs and market conditions, and traders should have a clear map of when different algos should be used to best accomplish their specific trading requirements.

- Vendor selection. Incorporate a "light" vendor review scan into your ongoing processes - the vendor picture within this space is too fluid to think of vendor selection as a one-time process. It's a critical element of your ongoing management of the trading desk and should be assigned, tracked and measured just like any other front-office process.

- Technology design. Call for backup - the technology considerations for algo trading need dedicated attention. Your IT teams should develop expertise in this area to support you on an ongoing basis. While this expertise cannot be developed overnight, start with ongoing and close teaming between front-office trading management and IT management.

What are the tangible results you'll achieve by taking this approach?

Algorithmic trading offers clear benefits to the buy-side firm - the approach discussed here accelerates the achievement of the following benefits across a greater volume of trades:

  1. Devising trade strategies that beat competitors due to algorithmic trading use.
  2. Improving trader efficiency to focus on revenue-enhancing trading strategies.
  3. Improving trade pricing through reduced market impact and increased anonymity.
  4. Reducing trading costs.
Buy-side firms have recognized the importance and value of algorithmic trading models. However, it's time for firms to dramatically diversify their algo selection, move beyond pure cash equities and explore new technology solutions to create lasting competitive advantage in portfolio execution.


Jonathan Cohn
Strategic IT Practice
Mercer Oliver Wyman

Cohn has more than 15 years of strategy consulting, technology and operations experience and has led many strategy, design and due-diligence engagements with investment banks, asset managers, major exchanges and retail banking institutions.

Prior to joining Mercer Oliver Wyman, where he currently is focused on the intersection of operations, IT and business strategy, Cohn was an associate partner for IBM's Financial Markets IT Strategy Practice and also worked at Sun Microsystems.