Long-only firms should embrace the new low-latency trading environment and adopt algorithms that can go head-to-head with the technology used by high-frequency traders (HFTs), according to a new report by consultancy TABB Group.
According to the report, ”Next-generation algorithms: high-frequency for long only,' traders who learn the lessons of high-frequency trading will gain the upper hand over those who do not.
“The buy-side should look to algorithmic providers that mimic high-frequency traders' approach to measuring and minimising transaction costs, technology infrastructure and reacting to risk limits,” said Cheyenne Morgan, TABB analyst and author of the report.
Morgan added that traditional buy-side firms are increasingly adopting a new breed of algorithms that seek to profit from market microstructure. As a result, she says, the execution landscape is now becoming a level playing field for long-only institutions that no longer need tread in fear.
The report argues that the core architecture of algorithms should be based on the latest low-latency technologies, and brokers should actively educate their buy-side clients on how to effectively implement the trading solutions they provide. While algos are already being developed to incorporate a broad range of market data feeds, the report also emphasises the importance of rigorous testing procedures for new entrants.
“High-frequency traders have passed along a skill set that allows firms to invigorate their trading techniques, intraday strategies, performance reaction and the way they employ the buy-side trader,” said Adam, Sussman, TABB Group's director of research. “Algorithms were at the beginning of the trading progression. Now as we enter a new age of trading, the innovation of these tools can be crucial to buy-side traders in maintaining a competitive edge.”