Matching expectations

At AllianceBernstein, we see algorithmic trading as an integral part of the overall trading process. Used correctly, we've shown it lowers market impact and information leakage and frees our traders to focus on more complex trades and trading strategies," says Siobhan McManus.

Plug and Play…

"Implementation of the right trading platform was the critical first step. Our multi-broker execution management system allows us to access all execution venues efficiently. However, we've found that none of the algorithmic, dark pool and smart order routing tools we've gained access to have been 'plug and play'. From the outset we've partnered with brokers to understand exactly what's being offered and how we can utilise it to get best execution for our clients," she explains.

Chris Jackson adds, "Once the platform is in place and the traders have a level of comfort with it, the work really starts. Every dealer has an idea of how they should trade based on an understanding of what their portfolio manager is seeking to achieve. We try to understand more about the different trading scenarios the traders encounter, the type of assets they trade and the implied speed of alpha of the various funds. In AllianceBernstein's case, traders have to be particularly flexible to deal with the different trading demands of the value and growth styles of business. We then step through the appropriate algorithms explaining their relative strengths and weaknesses. There's no point claiming we have an algorithmic answer for every trading situation. That's simply not true. Instead, we may end up recommending an alternative venue from the trading floor, such as portfolio trading, our specialist sales traders or capital commitment."

Controlling performance

"We use a combination of proprietary, third-party and broker TCA to help understand and control trading cost globally across all venues," says McManus. "Eighteen months ago, we set up the 'Quant Lab' team in the US to analyse our own trading. We found that around half the algorithms we were being offered by the Street were failing to deliver what was claimed."

"With the Merrill Lynch TCA product, we've sought to complement rather than compete with in-house or third party analysis," says Jackson. "AllianceBernstein's analysis gives them a clear picture of trading performance across all their businesses. We can complement this with a highly granular – often tick-by-tick – analysis of the way each order performs within Merrill Lynch. This gives Siobhan's team the tools to understand in detail how a particular trading strategy helped achieve the goals of the portfolio manager. Get this analysis right for a client, and any resulting change of strategy or customisation almost writes itself. In the current volatile market, this type of analysis has helped clients improve performance in certain situations by switching to more aggressive, risk-averse trading strategies, such as our OPLX algorithm."

SOR – partnership or 'go it alone'

"The growth in alternative venues means smart order routing (SOR) has become a hot topic in EMEA," notes McManus. "Proponents of investor-led SOR point out that there are significant benefits in terms of independence, control and confidentiality. AllianceBernstein has taken the view that we can best stay ahead of the game by leveraging the SOR technology available from the sell-side. At this time, like the majority of our counter-parts, building and maintaining an in-house SOR capability with the technology, ongoing development and maintenance this entails is simply an uneconomic proposition. Not to mention the additional regulatory overhead that comes with direct membership of an exchange.

"We recognise that our sell-side counterparts can leverage economies of scale and a level of in-house expertise and infrastructure that it is currently not in the best interests of our clients to replicate," she says.

Jackson concurs, "We've spent three years developing our EMEA SOR capability, we're confident that we have one of the most sophisticated routing platforms in EMEA. It's this capability that's allowed us to take advantage of both passive and aggressive liquidity on all the new multilateral trading facilities to save our clients in excess of 2.5 bps in market impact."

Relationship management

"Our primary goal is best execution for our clients," asserts McManus. "Despite the increased availability of self-directed trading technology to the buy-side, we've found we can extract most value from those brokers with whom we've fostered a long-term collaborative relationship."