02.07.2014
By Terry Flanagan

Futures Ramps Up Use of Algorithms

The futures industry is starting to get acclimated to the use of algorithmic trading, which has been a staple of equities for decades. As it does so, it’s requiring more customization in order to adapt algorithms to the specialized needs of futures.

“The algorithmic space in futures is less developed than in equities. Algorithmic trading has migrated from the cash equities markets to FX, and futures is just catching up now,” said Yuriy Shterk, head of derivatives product management at Fidessa Americas. “The majority of providers have adapted algos from equities into futures, and haven’t taken into account the nuances and complexities of the futures markets. Now, the algos are becoming more sophisticated and more tailored for the global nature of futures markets.”

Greater demand for algos is a direct result of the market’s growth, with more complex strategies and the need to automate processes prime factors driving adoption, according to Tabb Group’s Matt Simon. For optimal results, firms must use automation to improve trading desk efficiencies, lower execution risks, and compete with market participants already using and upgrading their advanced execution strategies.

“While FlexTrade’s customers have always been interested in adding advanced trading functionality, we are currently seeing a trend whereby large buy side firms are starting to build and enhance their own algorithms,” said Jamie Benincasa, executive vice president of FlexTrade. “This trend started with clients that wanted to use our platform to build their own dark routers, and continues today with firms that are seeking to exploit new opportunities in cross asset trading.”

For example, a firm that creates and trades ETFs can now use FlexTrade’s platform to calculate their own NAV and compare prices between cash baskets, ETFs, futures and options to determine which instrument offers the best exposure at the lowest cost. Once the decision is made, FlexTrade enables the client to specify custom routing strategies for each asset class to achieve best execution.

“We’ve provided some large multi-asset funds with the ability to gain FX exposure by allowing them to compare FX spot, forward and futures prices to algorithmically determine which instrument best suits their needs,” Benincasa said. “We’ve also recently completed extensive work for a wealth manager that runs an option overlay strategy for close to a thousand accounts.”

Among quant shops and hedge funds that are active in futures, almost all are using algos, but traditional buy side CTAs still have a long way to go, said Shterk.

“One change brought about by algorithmic trading is the frequency of orders,” he said. “It’s one thing when you’re sending 100 lots to the market; it’s another thing when you’re trying to slice those up into smaller sets, which results in more orders going to the market. It’s similar to the evolution that’s happened in the cash space over the last ten years.”

Algos have traditionally been provided by the sell side, this is certainly has been the case with futures. “Futures algorithms provided by futures commission merchants (FCMs) and facilitated through front-end trading systems are beginning to mature,” said Simon.

Noted Shterk, A lot of FCMS are providing their own algos or contracting with vendors to provide them. Some of the large buy side shops have employed their own proprietary algos. We also see regulators becoming more involved, as with the CFTC Concept Release. The need for compliance imposes an additional cost of doing business. Customers want consistent functionality in the algos they use, and want to make sure that the results are predictable.”

Related articles

  1. Algorithms have become more prevalent in the spot FX market.

  2. Congress Unlikely to Act on HFT

    QB’s Algo Suite for futures market trade execution is also being co-located to HKEX.

  3. Breaking data silos is key to deploying automation beyond 'nuisance' orders.

  4. They can be used on quantum hardware expected to be available in 5 to 10 years.

  5. Regulation and Liquidity Top Concerns in Fixed income

    Streaming blocks change the basis of matching and price discovery so institutions can find new liquidity.