U.S. Algorithm Spending Slows
Beyond Single Stocks
As the industry looks to reduce its overall risk exposure, portfolio-driven algorithms also will be hot in 2008, according to EdgeTrade's Wald. "Algorithms looking to aggregate baskets and groups of stocks and correlations between them and between sectors will be key," he says.
Merrill's Morakis also says that portfolio-based algorithms for risk reduction will be a big focus going forward. "Most algorithms are still somewhat single-stock-based," he explains. And while he says there are a few portfolio-based algorithms out on The Street, there still is not a critical mass of successful options in this area.
"In the next year we'll see better portfolio-based algorithms that offer more-sophisticated portfolio risk reduction options and better optimization processes to trade a portfolio more efficiently," Morakis asserts. Portfolios are open to sector risk, market cap risk and other risk factors, he explains, but having more control over monitoring these risks while trading will allow traders to mitigate such risks better. "The controls and the ability to truly monitor and adjust risk on the fly will be much better in the coming year," Morakis says.
In order to accomplish this, "Algorithms going forward will have to take into account news feeds and any type of direct or indirect data source that can affect the trading decision or life cycle," Datamonitor's Shah adds. Algorithmic trading applications will have to be more adaptable and ready to evolve to absorb new and different information types, he says. The move will be away from customized, closed-box systems that can't be updated or upgraded on the fly.
Shah also sees growth potential in cross-asset algorithms. "Firms will have to move away from siloed mentalities and siloed trading systems," he contends. "Cross-asset will become the norm."
Further, new product sets will help drive algorithmic trading in areas such as emerging markets or emerging geographies, according to Shah. He points to the Middle East countries as particularly ripe for growth.
Merrill's Morakis says he expects to see more and more sophisticated algorithms for the futures, foreign exchange and options markets in the upcoming year. "The algorithms would utilize similar benchmarks and risk methodology as our equity offerings while integrating the unique trading characteristics of the individual markets," he describes.
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