Transparency tops buy-side’s algo needs – The TRADE Poll

Buy-side traders are demanding better transparency on order routing from their brokers, according to this month’s poll results on

Buy-side traders are demanding better transparency on order routing from their brokers, according to this month’s poll results on

More order-routing transparency was identified by 35.9% of respondents as the top algo development brokers should prioritise this year, ahead of opportunistic algos (28.9%), greater algo customisation (28.1%) and small-cap algos (7%).

The results suggest the buy-side is seeking as much information as possible to make informed and intelligent execution decisions. But some sell-siders are perplexed that full transparency on order routing is not considered a staple already.

“It’s hard for me to imagine a broker not giving this to their clients,” said Joe Wald, managing director at US broker Knight Capital. “It’s just part of the business.”

“There is no reason for the sell-side not to be transparent on how orders are routed,” added Mark Goodman, head of Quantitative Electronic Services at Société Générale Corporate and Investment Banking. “If brokers addressed this need for transparency, there would be less concern by the buy-side and subsequently less of a regulatory focus on dark trading. A lack of transparency indicates that the broker may be placing his own interests ahead of the client.”

Execution routing and transparency should go further than simply stating where trades were executed to include all the destinations to which an order is exposed, according to Goodman who notes that an increased focus in transparency is likely to be linked to rising demands for customisation.

“If you can’t give clients full transparency on how their order flow is handled, it’s very hard to engage in a customisation discussion,” he said. “The broker needs an in-depth understanding of what the client is trying to achieve and the buy-side needs to know how their trades interact with the wider market.”

But the fact that almost of third of respondents to the poll want algorithms that are better tailored to their own needs shows that brokers are not doing enough to provide the service that clients now expect, said Wald.

“I believe that the requests for more customisation means the buy-side is being under-serviced by their brokers in terms of the strategies they are offered,” Wald said. “Algos are not becoming commoditised and I think brokers can do more to fulfil buy-side needs.”

The similarly high number of responses for opportunistic algorithms is perhaps driven by the high volatility and low volumes that have characterised markets in recent times. Goodman highlighted the need for orders to be exposed to as many pools as liquidity as possible in the current environment but added that visibility on how and when an algo chooses to be opportunistic is also crucial.

Algorithms that target mid- and small-cap liquidity continue to grow in number and Wald said he was surprised at the low number of votes this received.

“We have definitely seen increased client demand for small-cap algos,” said Wald. “Tools and strategies to target more difficult trades are definitely growing in traction.”