Demand Stays Strong For Aggressive Algorithms
Traders seeking liquidity-grabbing algorithms
June 1, 2009
Traders' appetite remains strong for algorithms which aggressively complete transactions in the least amount of time and as unobtrusively as possible, as prices of securities continue to swing widely on financial markets, say both professional traders and technology providers.
Use of algorithms that can move rapidly to grab liquidity found in either displayed and non-displayed markets in fact is on the upswing, say these traders and providers. This is leading to almost constant tweaking of the most aggressive algorithms to take advantage of changing markets, they say.
One example: The launch in April of ITG's Raider, created in response to customer requests for an aggressive algorithm which allows for greater calibration of performance. The algorithm provides access to more than 22 dark pools and 10 varying levels of trading urgency. Users also have the ability to seek liquidity in dark and light pools of capital simultaneously. Another: Many algorithms supplied by sell-side firms such as Credit Suisse, Goldman Sachs and UBS have seen an upswing in demand of late and as such, are being updated more frequently, often on a daily basis.
"Our clients are definitely expanding their usage of our two most aggressive algorithms--Guerilla and Sniper," reports Dmitiri Galinov, a director and head of liquidity strategy at Credit Suisse Advanced Execution Services, who adds that due to this demand, his group is constantly adding access to new dark pools as they pop up.
Market participants say that demand for aggressive algorithms is growing primarily because of the markets' current volatility, the uncertainty of how long the volatility will last and the greater familiarity that many traders now have with these powerful trading tools. Traders' expanded use and greater familiarity with dark pool trading is also a contributing factor.
"People have become much more comfortable in the use of the more aggressive algorithms," said Bill Yost, a managing partner with Quotient Investors, a quantitative oriented, equity management firm.
Average daily volume in non-displayed markets increased by 7.58 percent in March, according to Rosenblatt Securities, and consolidated volume grew by 12.47 percent month-to-month. The Chicago Board of Exchange's Volatility Index remained at 44.8 for the month, an "historically elevated level,'' the execution specialist said. It closed at 30.62 on May 26.
"When there is more volatility and the markets are swinging wildly and your benchmark is the opening price, if you take six hours as opposed to two hours to complete a list, you are far more exposed to what the market is doing; more aggressive algos get the job done faster," Yost said.
According to Sang Lee, a managing partner at Aite Group, the first iteration of aggressive algorithms were more about looking for liquidity in the displayed market, but now algorithms have evolved to the point where aggressive algorithms seeking liquidity can operate simultaneously in both dark and displayed venues, allowing for greater efficiency and speed of execution.
Aite Group research shows that leading algorithms in the aggressive algo category include Scouter from Citi, Guerilla and Sniper algorithms from Credit Suisse, Sonar from Goldman Sachs, the Raider algorithm from ITG and the Tap algorithm from UBS. ITG said the number of organizations using its Raider algorithm, for example, has grown from 20 beta users in April to nearly 80 users in May.
