The commoditisation of algorithms in Asia has propelled brokers into a race to deliver creative offerings, such as Instinet's Execution Experts suite of algorithms which the firm is currently rolling out to clients in the region.
According to Joel Hurewitz, the agency broker's head of sales – broker dealer and liquidity, Asian clients have become very familiar with the core suite of execution tools and are looking to providers for “more interesting” algorithms.
“We've got to a stage where clients in Asia are keen to work with us to build bespoke algo or tweak algos to their requirements especially adding in ”I would' functionality for the dark,” he said.
A customised version of the Experts suite, originally launched for US clients in 2008, has been in use by Instinet's own traders in Asia since the start of 2010. In recent months, the firm has been working with third-party vendors to incorporate the algorithms into their execution management systems (EMSs). Experts is also available through Instinet's Newport 3 EMS and through direct FIX connectivity.
The Execution Experts strategies have been modified for use in the region, for example, by factoring in Asian historic tick data, bid-offer spreads and, where relevant, dark liquidity destinations. The suite in Asia-Pacific consists of ten individual strategies, including a multi-benchmark strategy called TEN that allows users to balance tracking VWAP, arrival and departure price by assigning weights to each of the three benchmarks. TEN uses dynamic programming optimisation to integrate Instinet's price and volume prediction models into a robust benchmark strategy.
Bryce Kelly, executive director and head of product strategy, Asia, claims that Experts takes a different approach to normal schedule-based algorithmic trading. “It is analytics driven and responds to current market conditions. Typically for a VWAP algorithm, you would calculate ahead of time what the normal volume profile looks like for a given stock and you would trade accordingly. The Expert suite still allows you to trade against the standard benchmarks – arrival price / implementation shortfall, VWAP close etc – while it also looks at trading conditions right now, i.e. what's the effective spread of the stock and how does that compare against the current market spread. It enables you to know not just how much to trade, but also at what price points to trade.
According to Kelly, one of the major adjustments made to the suite before making it widely available in Asia concerned the trade-off between market impact and the opportunity risk of missing the benchmark price. “While Asian markets can be illiquid, there are still some stocks that do more in the open and closing auctions, so Experts allows you more control to participate at greater volumes than you would normally do as dictated by a normal volume profile,” he said.
Another strategy within Experts is the Cobra, which seeks hidden liquidity in both lit and dark venues while trying to minimise signalling and market impact while maximising share traded. There's also BlockPeg which accesses liquidity with minimal impact on the spread by posting orders on the passive side of the market while crossing the spread for user specified quantities.
Nighthawk logic is also embedded in all strategies in the Experts suite. Nighthawk is Instinet's liquidity aggregation tool which is designed to seek hidden liquidity, intelligently accessing dark-liquidity sources to execute orders with sophisticated price-modelling and allocation logic.
Nighthawk recorded an average fill rate of 36% in May 2011 with consistently low slippage across market cap groups on filled orders of 0bps against the arrival price, 4bps against XWAP – the volume weighted price average across the time period of the order from start to finish – and 2bps against the participation-weighted average price (PWAP). It also recorded 494.9% of volume over life of the order, reflects that when blocks are found in the dark they are in excess of the amount of liquidity trading in the primary exchange over the period of the order.
Hurewitz said, “There are orders that are such a large percentage of average daily volume that a client would not be able to do anything with that order for days or weeks.
So, rather than just have it sitting on his desk and having to send out a portion every day to various brokers, one of the benefits of Nighthawk is accessing liquidity anonymously in the dark.”
Glenn Lesko, CEO, Asia, said the company's approach to aggregating liquidity is to give its clients as many options as possible. “If we come across a pool, we would like to apply our venue analysis process to it and figure out what type of players are in that pool, what's its value and give our clients that option. Typically we like to give pools a chance but we won't interact with them without giving it serious consideration, whether its in terms of adding value to our execution for our clients, or whether our clients would like to interact with it,” he said.
Author: Jill Wong