Algorithmic Trading
The News Is the News | Fine-Tuning Algos to Fit the Market | Trading on the News | Goldman Emerges as Global Algo Leader | Buy-Side-Driven Trading Takes Hold in Hong Kong |
The News Is the News
April 3, 2007
If ever there was a valid application for the cliche that change is the only constant, it's algorithmic trading. It is a technology that, by its nature, exists on shifting ground. The financial institutions and system developers who drive algorithmic innovations--a crowded field that is accustomed to competition as a permanent Wall Street state--have had to pick up their pace and raise their game ever higher. New products are readily mimicked if not surpassed, and that happens in not much more time than it takes to run a strategy that is built on trading decisions that machines make and carry out in subsecond timeframes.
So how does anybody keep up with all those market demands for more and faster electronic trading products? And how can we, using the traditional medium of words on paper (or on a Web page), capture what's happening in a business that changes by the day, hour or even minute? What we can do--and what's probably necessary amid the frenzy of moment-by-moment activity--is step back and put these developments in perspective. For all the talk of millisecond and microsecond executions, algorithmic and programmatic trading systems are the result of months and years of research and development. As Securities Industry News has covered the leaders in algo trading--ranging from Credit Suisse to agency brokerages such as Instinet and Investment Technology Group to Goldman Sachs & Co.--one of the common denominators, or constants or recurring themes, has to do with consistency and commitment over a long period of time. The execution of trades may occur in under a second, but the execution of algorithmic trading as a business strategy is anything but short-term or instantaneous. This isn't for dabblers, and that's why we find so much that is newsworthy to delve into and cover in our weekly and daily media. One of those new trends, interestingly, is that algorithmic systems are becoming consumers of news, and Dow Jones & Co. and Reuters Group, among others, have developed "machine-readable news" products to feed the analytical maw alongside conventional market data.
As Joseph Radigan suggests, algorithms aren't so much the next new thing in automated trading as they are trading itself. They have become entire business lines in themselves; they are responsible for sizable proportions of daily stock volumes; and, according to research firm Aite Group, spending on the important algo-trading component of event processing systems could approach $1 billion by the end of the decade.
A December 2006 survey by Framingham, Mass.-based Financial Insights, sponsored by Bank of America and following up on a similar one the year before, found that 93 percent of hedge funds and 71 percent of registered investment advisers were using algorithmic trading, up from 92 percent and 66 percent, respectively. In 2006, 63 percent of respondents increased their usage of algo trading, and the rest stayed the same. "The market could certainly still be described as hot, particularly in the hedge fund sector and for the next generation of algorithms," the report said. That's one reason we're here.
