SocGen Develops Dark-Pool Algos
French bank Societe Generale has used its well-known derivatives expertise to develop algos specifically for its equities dark pool which it launched last year.
Mark Goodman, head of quantitative electronic services Europe at Societe Generale Corporate & Investment Banking , told Markets Media: “Our business has grown rapidly in the last three and a half years as we have been able to provide access to a differentiated type of liquidity and we knew there was an appetite for non-commoditised algos.”
In its results for the first nine months of this year Societe Generale reported equities revenues of €2.03bn, 19% more than the €1.7bn in the first three quarters of last year.
Goodman joined the French bank in February 2010 as its first quantitative electronic services head after more than 10 years at UBS where he was head of sales for direction execution in Europe, the Middle East and Africa. In April 2012 Societe Generale announced the launch of AlphaY, a dark pool for cash equities.
At UBS Goodman was used to one of the largest MTFs in Europe and so knew Societe Generale would have to offer differentiated products to gain share. He turned to the bank’s in-house quant team and the huge database the bank uses for its derivatives business to design algos and smart routers.
“We have built algos that are not just volume based but leverage our price-driven models,” he said. “They predict short-term price movements and get improve execution through looking at factors outside the order book.”
For example, with an auto stock the pricing model will send a signal if one such factor, the auto sector future, spikes as shares are likely to become more expensive. “Another example is looking at news flow to predict volatility and pull trades back if HFT players are going to be there,” Goodman added.
Flows from bank’s derivatives activities are pooled together to provide liquidity in Alpha Y. Clients have first access and are protected from aggressive high-frequency strategies.
“The majority of our flow in AlphaY comes from the derivatives business’ hedging activity which clients want to trade against, it’s non-toxic and passive,” said Goodman. “Where clients actively measure performance SG is highly rated. The key for our edge is to really understand the client’s flow in-depth and customise our algos to meet that objective.”
European regulators are discussing the second Markets in Financial Instruments Directive which could place restrictions on volumes traded in dark pools. “Mifid II is likely to change the legal characteristics of dark pools and provide some form of consolidated tape. This will give us the opportunity to prove best execution,” argued Goodman.
He believes there is room for further growth for Alpha Y despite the new regulations. “We trade in 42 markets and we are expanding in the US. Europe is our largest established market but we have not yet gone into Russia or the frontier,” he said.