In a white paper released yesterday, Quod Financial, a provider of order management systems for buy- and sell-side institutions, claims that market developments including liquidity fragmentation, new regulatory requirements for best execution and the rise of dark pools are making the current generation of ‘execution’ algorithms , in particular those driven by the scheduling and slicing approach like volume weighted average price (VWAP), obsolete.
The white paper, entitled 'The next generation in algorithmic trading: liquidity-seeking adaptive execution algorithms', says that market forces are driving the development of a new generation of 'execution' algorithms that are liquidity-seeking and capable of adapting to changing market conditions.
"The rapid increase of dark pools, internalisation, and liquidity fragmentation undermine the effectiveness of the current statistical-based algorithms," comments Mickael Rouillere, CTO, Quod Financial. "There is also a need to combine trade execution with slicing, scheduling or other algorithms without increasing overall latency," he adds.
"Liquidity is one of the fundamentals of electronic trading, and there is far more liquidity available than that seen on the exchanges and crossing networks," notes Ali Pichvai, managing director, Quod Financial. "Predicting where this liquidity lies is the next big step in 'execution' algorithms. These new-generation algorithms will incorporate some of the features of their current-generation counterparts, such as limiting market impact, but with larger and far more complex execution objectives. We have succeeded in building such liquidity-seeking algorithms and are currently delivering these for our clients," he continues.