As the global head of quantitative trading at AllianceBernstein, Dmitry Rakhlin is always on the lookout for ways to reduce transaction costs while speeding up the investment firm's order-building and -matching capabilities. Like many quantitative trading operations, Rahklin says, AllianceBernstein has been grappling with elevated transaction costs as a weak global trading environment persists. Rakhlin reveals how the asset manager has been navigating a wobbly market, highlights the firm's biggest technological initiatives in the past year, and explains why AllianceBernstein is weighing delaying transactions until the market has been open for at least a half-hour.
Summarize your overall trading strategy.
Rakhlin: We execute for a multitude of portfolios, both fundamentally and quantitatively driven. We have a variety of tools to enhance our trading abilities, and we keep researching new tools. We are becoming more nimble in the way we build and trade our orders. We are also better integrated within the organization to add value to the investment process.
How do you execute trades?
Rakhlin: We have a trading infrastructure with an OMS, EMS and an integrated analytical module. For each order that comes in, we generate a recommendation based on current and historical data. Certain segments of the order flow -- mostly small orders -- are auto-traded according to these recommendations. Remaining orders are handled by traders who decide on the optimal execution strategy. Quantitative recommendations as well as intratrade performance and market alerts are made available for traders via EMS and proprietary alerting tools.
Which OMS and EMS do you use?
Rakhlin: We use the Longview OMS and Portware EMS.
How reliant are you on transaction cost analysis?
Rakhlin: Very much so. We consume multiple sell-side transaction cost models, and it's an important part of our trading workflow. We use T-cost estimates as one of the factors to price blocks and also to evaluate our trading performance. Obviously, we have other input factors, such as present market conditions, the type of fund this order is being traded for, trade urgency and so on.
What types of algorithms do you use?
Rakhlin: Most sell-side algorithms are available to us. Lately, the majority of our executions are done with opportunistic, liquidity-seeking algorithms. These algorithms generally interact more efficiently with fragmented liquidity and have a greater degree of randomization, as they are not as constrained as the schedule-driven strategies. Recent data from the sell side also shows that opportunistic algorithms perform better -- or suffer less -- in high-volatility environments.
How are you navigating the current volatililty?
Rakhlin: The markets are very volatile, both price-wise and volume-wise, and intraday correlations are high. As a result, transaction costs and the execution risk of large institutional orders are clearly elevated. We are employing multiple tactics to mitigate these effects. As I have said above, we are trading more through algorithms that are better suited for the current environment.
We are looking for ways to reduce the amount of trading around the open -- the most volatile period of the day when the liquidity is very transient. Obviously, we cannot adopt a simple rule of thumb to not trade prior to 10 a.m., as the opportunity cost can be very high. Instead, we're coming up with more elaborate guidelines based on quantitative factors.
Collaboration with portfolio managers is also very important. A trader who better understands portfolios, risk exposures and the views of portfolio managers can make better trading decisions and even benefit from volatility.
Are dark pools important to AllianceBernstein? What percentage of your trades are executed in the dark?
Rakhlin: We have access to all existing dark pools. The utilization depends on many factors, including order urgency, stock capitalization, time of day, intraday volatility, etc. I wouldn't give an average number, as it changes month over month and generally can be misleading. It's akin to asking, "What is the average temperature in a hospital?" The answer cannot be very useful, unless you ask about a specific area within the hospital.
Generally, it can be very frustrating to deal with highly fragmented U.S. markets. But dark pools are a viable source of liquidity, and they can and should be utilized by institutional traders to reduce the overall market impact of their orders.
How reliant are you on overseas markets?
Rakhlin: We are a global firm, and we have trading desks in every region. There is ongoing communication across desks; also, each desk produces daily commentary -- sometimes multiple commentaries -- targeted for other traders and portfolio managers. Clearly we benefit from such exchange of information.
What major technology projects have you undertaken in the past year?
Rakhlin: We're enhancing our OMS and the middle office to improve order-building capabilities, streamline our trading infrastructure and add more asset classes. Another big effort is to enhance our real-time analytical platform and to fully integrate it with Portware.
How is AllianceBernstein preparing for the upcoming Dodd-Frank requirements?
Rakhlin: As the specifics of this reform take shape, we are keeping abreast of all ongoing rulemakings, discussions and clarifications. There is a coordinated effort across the firm to adapt to new regulations.
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