ALGORITHMIC FX TRADING
do that but it comes down to how you engage with the market. Trigger algos are used to enable firms to react to certain market opportunities – if, for example, a large block of a currency becomes available. And then there are the discretionary algos, where a trader may set various limits but is also prepared to go beyond that limit if the right conditions exist.
Some of the customisation is determined by whether the client wants to float or stand its ground – that is, does the client want to be more passive and not stand in the way of the market should conditions and liquidity change in the course of the day, says Stone. “Some traders are very hands-on and want to control their orders, maybe by setting various triggers and using trailing stops. Others are dictated by their investment strategy of what they are looking to do, therefore the algorithms will be aimed at minimising the market impact as much as possible by splitting the order up into random patterns.”
To some degree the advances in algorithmic and electronic trading have simply enabled traders to automate the human characteristics that underpinned their trading strategies in the pre-electronic era. But the advent of electronic trading has also enabled them to do things they simply could not do before, says Stone. “When e-trading exploded it brought a lot more transparency and different ways to access and engage the market. Tis opened up new types of strategies and led to a massive increase in trading volume. Tis pattern has been repeated in every market that has evolved electronically.”
Electronic trading really took hold in the equities market. “We brought a lot of our equity algorithms over with us to the FX market but we found that most people in the FX world use us because we integrate our algorithms into our front-end,” says Stone. “It is not a black box. Te algortihm is transparent so you can see it operates within the market depth and the value it adds to executions. It also allows traders to intervene and alter the aggression level of an algo to capitalise on different market conditions.”
Algo or strategy modifications can also be automated based on pre-determined rules or triggers, although most clients prefer to enact this manually until they feel are comfortable with the technology, says Stone. “It depends on the trader. Tey all have different behaviour. And it is a big leap to go from manual
140 | october 2011 e-FOREX Gary Stone “We brought a lot of our equity algorithms
over with us to the FX market but we found that most people in the FX world use us because we integrate our algorithms into our front-end,”
changes to entrusting the algorithm to automate the modification.”
Transparency of workflow
Te other big issue in the algorithmic trading market is the transparency, says Stone. “At Bloomberg Tradebook we have the advantage of linking transparency and workflow. Tis means that we can make sure that the clients have control of their orders and the comfort of seeing the algorithms operate in the market trades at all times. Algorithm transparency has been a massive change and one that allows them to better evaluate performance and provide critical feedback for customisation and enhancements.
“We continually make significant investments in our infrastructure to ensure that we can maintain high volumes in times of market volatility.” As volatility and market complexity increases, the key to meeting clients demands, says Stone, is ensuring that there is sufficient balance between quantitative complexity and ease-of-use. “We believe you need to have a system where the user interface is simple and the complexity is on the inside.”
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