Algo Development Moves In-House

Terry Flanagan

Automated trading, barely a blip on the radar screen 10 years ago, has evolved to the point where brute-force computation is giving way to a subtler, more nuanced type of approach.

“The speed game is quickly becoming a theme of the past, and firms that have more intelligent execution logic will ultimately have a more sustainable business,” said Jamie Oschefski, head of accounts and strategic partnerships at trading systems provider Embium.

Evidence of this trend away from the race to zero is the growing number of automated trading firms have surfaced with the intent to bring their execution services in house as opposed to the traditional method of using broker algorithms.

“There is a general sense that fund manager’s feel they are missing out on something,” said Travis Felker, Embium’s head of product management. “While work continues on optimizing the traditional algorithm package (VWAP, TWAP, etc.), and products are developed to optimize the algorithm selection process based on market environment, some managers are coming to the realization that their alpha would be affected most substantially by bringing their custom logic in-house.”

As technology advancements decrease the magnitude of the task of customizing execution logic, it seems as though managers are considering this as a viable alternative, in some cases, for the first time.

In an effort to service expanding demand, technology firms such as Procedure Driven Quotes (PDQ) are offering user defined order logic.

“PDQ’s AlgoSuite is where end user firms can describe order logic which can range from simple smart order routing to full algorithm execution logic, which can then be accessed using simple orders from their current EMS,” said Felker.

Ultimately, firms are finding more confidence in their own innovative ideas as opposed to the optimization of legacy broker algorithms which have diminishing returns. Innovation and the right set of internal tools can create a much larger reward gap and help re-establish an edge.

“Many of our current clients attempted to build in-house, but quickly realized this was not a sustainable part of their business and was taking away from their core focus,” Oschefski said.

Embium’s Execution Blueprint is specifically designed to optimally execute orders while providing the user with substantial route design and configuration flexibility. This canvas empowers the trader to create their own execution logic as states connected by events.

“Everyone knows how commoditized execution algorithms are,” said Oschefski. “On top of that, sending your orders to 3rd party smart routers is very costly, opaque and rigid. The execution blueprint offers transparency and flexibility to create the bespoke smart routers our clients want to ensure best execution for entries, exits or cancelations.”

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