In a fragmented marketplace, traders are looking at any number of tactics or strategies they can use to capture alpha, some of which are useful in volatile markets, and some of which are useful in relatively calm markets for a particular stock, where if they tip their hand, they run the risk of creating their own volatility.

Average institutional order size is somewhere around 170,000 shares, so they’re much larger than the market, which has an average execution size closer to 250 shares, according to John Adam, global head of product management at Portware, an execution management system provider for large asset managers.

“I could potentially have such a large position that I create my own trap and it’s tough to get out,” he said. “In a volatile market, it could be easy for me to get in because volatility and volume sometimes go hand in hand, but I want to make sure that I can exit that stock and have the strategy and tactics in play to do so as well. If I’m looking at volatility in the stock, I’m having a much, much more involved dialogue with my desk about the appearance and disappearance of that volatility.”

In consequence, communication between the portfolio manager and trader is becoming much more bidirectional.

“The trading desk is in the position now to give feedback to the portfolio manager saying, ‘In this kind of market, this is a stock that it’s going to take us some time to get into or I have a very immediate opportunity, do you want to go in, do you want to reload your order, do you want to take more of this?’” Adam said.

Portware, through its AlphaVision product, will recommend a certain type of algorithm depending on market conditions. Given that the market is changing, minute to minute or hour to hour, what a trader starts out with at the beginning of the day may not make sense to stick with throughout the course of the day.

“I might use a Dark Start strategy at the start of the day, and switch to a relative participation or an implementation shortfall strategy later on in the day because that’s what the analytics tell me makes sense and that’s what will retain the most alpha,” said Adam. “We have an ability to switch automatically ahead of the shifts in the market in order to capture more of the alpha with that particular trade.”

The goal is to enhance a trader’s decision capability, not replace it. “I don’t think we’re anywhere near a point where AI could match the performance of an experienced trader on the desk,” Adam said. “What we’re looking to do is enhance their judgment using what I call a ‘fly by wire’ type technology where they’re continuing to get updates, a rationale for either continuing with their decision path or switching it.”

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