Buy Side Gets Closer to Futures Benchmarks
If trading is a business of microseconds and latency-focused software, then buy-side traders are going to get closer to the mark when executing fixed-income futures orders.
Quantitative Brokers, a provider of agency algorithms for futures and fixed income markets to both the buy- and sell-side, has released “Closer,” its brand new algorithm designed to assist traders of futures. According to Christian Hauff, CEO of Quantitative Brokers, the new algorithm was specifically designed from the ground up to help traders execute their orders as close as possible to a futures’ contracts closing price or settlement price benchmark.
“Algorithmic trading is rapidly gaining traction across the capital markets, especially now in fixed income as firms strive to achieve best execution,” Hauff told Markets Media in a phone interview. “Establishing the best and most accurate close price can be very difficult. Now we’ve created an algorithm that can take the manual process of getting the closes and compute it automatically.”
Key Futures settlement times are at 3pm for fixed Income commodities and 4pm EST for equity index products.
How does Closer work?
Closer has been built to service the industry’s growing need for best execution around the closing price benchmark, a challenge common to those within the asset management community,” Hauff explained. Asset managers and other institutional investors need a more efficient way to calculate and trade their “MOC” or “Target Close” futures orders to establish the best price for their customers.
Closer works directly from a trader’s desktop and via their own existing EMS or OMS provider.
Closer uses real-time analytics to automatically determine the optimal start and end times for the order, removing the need for the trader to set any parameters. A trader can remove parameters or alter them if need be. Also, all Closer orders are integrated into the broker’s own transaction cost analytics (TCA) platform which provides full transparency into every child order and action taken by the algorithm.
“We want the trader to have an end-to-end seamless trading experience and see how Closer benefits him,” Hauff added.
Closer’s logic incorporates technology that monitors short-term pricing signals that detect price momentum or reversion around the settlement window. The algo also uses technology to help it generate a more exact volume forecast for the futures contract. Hauff explained that futures volume can vary not just as delivery nears but also during the month due to extraneous events, such as political or financial markets events.
The algorithm was researched, designed, built and tested in under six months.
Closer is specifically targeted at hedge funds, index fund managers and mutual funds – any institutional investor tied to underlying retail investors. Hauff said that these investors have the need to benchmark performance daily and mark to market their inflows and outflows, relative to settlement price. This leaves these institutions, he added, to mercy of the settlement price as determined by the exchanges.
“Closer calculates its estimate of the settlement based on several factors such as, the 30 second or 90 second VWAP, or the size of last trade.,” Hauff said. “Given the increasingly electronic nature of the market, using the algo this makes them far more productive. We need something to automate and track price as close to the settlement price as calculated by the exchanges.”
Previously, traders had to manually estimate the close and base executions off that approximation.
Closer also incorporates our own anti-cross logic, which prevents opposing orders, from the same client, crossing on the exchange, Hauff said. There are times when one money manager could have multiple orders for the same security coming from different funds or portfolio managers – thus now there are no more wash trades or mis-matches.
Closer joins the broker’s existing suite of fixed-income best execution algorithms: Bolt, Strobe, Legger and The Roll. In the future, Closer will also be expanded to include commodities futures and equity index futures.
MORE ON ALGORITHMIC TRADING:
- Algorithmic Trading Usage: Variations by Strategy ( by ITG)
- Americas Will Continue to Dominate the Global Algorithmic Trading Market Until 2020, Says Technavio
- Small-Cap Algo Piques Buy-Side Interest
Agency broker moves beyond execution to offer a broader suite of services.
Algorithms have become more prevalent in the spot FX market.
QB’s Algo Suite for futures market trade execution is also being co-located to HKEX.
Breaking data silos is key to deploying automation beyond 'nuisance' orders.
They can be used on quantum hardware expected to be available in 5 to 10 years.