US buy-side traders could be adding unnecessary costs by micromanaging trades that could be better handled by algorithms, according to Nik Wislang, head of electronic trading at global investment management firm GLG Partners.
“People focus too narrowly on execution sometimes,” he says. “The typical US desk likes to use direct market access and interact with the microstructure of the market, even splitting up child orders manually. But the cost of trading is not just execution – that’s only a small part of the total.”
GLG was purchased by Man Group, known for its black box, systematic trading strategies, at the end of 2010. GLG’s core trading style used to be purely based on stock selection by human beings. Yet Wislang now believes that algorithms are indeed better suited to certain tasks than humans – and that ignoring the impact of trader meddling at the execution level would be a serious mistake.
“When a trader decides not to use an algorithm and interacts with the marketplace, that causes a lot of tickets and a lot of costs downstream in settling all these smaller trades,” he says. “I’m of the view an algo will do better than a human. Using an algo, you only have one order to the broker, reducing the settlement costs as well as the chance of things going wrong.”
Taking into account the cost of a trade in terms of settlement, risk management, confirmation, sending trade files to administrators and maintaining sufficient staff in the back office to deal with the trade data, might cause asset managers to view the value of their execution choices differently, Wislang suggests.
Back-office costs have long been a contentious issue in Europe, with post-trade costs thought to be up to ten times the equivalent in the US. The greater cost of post-trade services in Europe could make the kind of direct intervention and micromanagement Wislang observes in the US prohibitively expensive this side of the Atlantic – suggesting that European traders are already more willing to use algorithms for basic tasks such as splitting up child orders.
“Let the machines deal with the orders that are appropriate to them,” says Wislang. “Human traders should deal when there are factors that require the subtleties that humans can detect, such as the intonation in the broker’s voice over the phone. That’s when a human being can really add value to a trade.”