BRAXXON News - Algorithmic Trading
These are challenging times for Hedge Funds. The competition to produce exceptional returns is intense, driving the need to effectively leverage the asset base of funds. At the same time, traditionally lean organisations are faced with the need to effectively manage workloads whilst maximising control over market access.
Two key technologies have emerged in the equity market place that can help manage these pressures.
1. Direct Market Access, which allows the hedge fund trader to interact directly with the market place without the involvement of a sell side trader.
2. Algorithmic Trading.
Algorithmic Trading allows large trades to be broken into smaller tranches and executed without being detected by other traders and market makers. It is particularly effective in supporting the trading of major blocks of large capitalisation stocks. Surveys suggest that by 2008 Algorithmic Trading will account for 40% of total US equities traded across all markets Similar growth rates are predicted for Europe.
Hedge Funds are no strangers to the use of proprietary algorithms and have often used them as a base to develop models, trading techniques and order management processes. The evolution of Algorithmic Trading has seen brokers develop trading engines. Access to these engines and their algorithms for the buy side has been made available through vendor order management and market data systems. The adoption of Algorithmic Trading is also changing the dynamic between buy side and sell side firms. Brokers are evolving into "execution consultants" delineating their services through technology offerings.
Selecting and implementing the appropriate systems and broker algorithms for Hedge Funds is a key challenge to their successful adoption. Algorithms may generate thousands of orders per second followed by thousands of cancellations. The technologies must, therefore, manage high transaction volumes while delivering consistently low latencies. They must also facilitate the management and integration of Research, Order Management Systems (OMS), Direct Market Access (DMA), Algorithmic Trading and pre- and post- Trade Analysis.
Some brokers allow the creation of customised algorithms that can be adapted to support Hedge Funds' individual trading styles. Other brokers are widening algorithmic support to include other products such as foreign exchange, fixed income and futures and options. This is particularly relevant to funds running multi asset strategies. Thought must also be given to the performance measurement of algorithmic driven trading. Typical methods can include Volume Weighted Average Price, Time Slicing and Implementaion Shortfall.
A considered introduction of Algorithmic Trading offers real opportunity for Hedge Funds to take a major step forward in access and control over the trading market place.