Implication of Algo trading

13 Pages·2007·0.23 MB·English

Foreign Exchange
Implications of Algorithmic
Trading
Date: 23rd May 2007
Produced by: Toby Cole
The materials may not be used or relied upon in any way.
CREDIT SUISSE SECURITIES (EUROPE) LIMITED
Algorithmic Trading
“The Nissan Canton plant features 853 technologically advanced robots that will
work alongside [a few] skilled employees.” Is this our future?
Source: http://www.plantautomation-technology.com/projects/nissan_canton/index.html#nissan_canton7
In this presentation…
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Algorithmic Trading – Do you mean what
I mean?
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What is changing in the market?
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Implications of different algorithmic
developments
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Discussion points
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“Algorithmic Trade” – Do you mean what I mean?
(cid:131)
Statistical Trading – “traditional” algo trading. Relative value
trading, black box/CTA-style algorithms, macro portfolio models.
Generates orders.
(cid:131)
Auto-hedging/Position Targeting – dynamic monitoring and
management of risk levels. Generates hedging orders.
(cid:131)
Algorithmic Execution – automating trading styles and using
technology to work the placement of trades. Does not generate
orders.
(cid:131)
Liquidity Access – optimisation of access to multiple trading
venues. Does not generate orders.
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FX Market – Projected Algorithmic FX Trading
With an estimated 7% adoption rate at the end of 2006, algorithmic
trading is clearly still in early stages. Expected to increase to
approximately 25% be the end of 2010.
Source: AiteGroup“ElectronicFX: Welcome to the Banks’ Neverland” April 2007
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Market Dynamics are Changing
70%
Inter-dealer
60%
50%
40%
Client-to-dealer
30%
20%
10%
0%
1995 1998 2001 2004 2006
Source: AiteGroup“ElectronicFX: Welcome to the Banks’ Neverland” April 2007
10 years ago Inter-bank market accounted for > 60% total daily t/o.
End 2006 Customer Market was almost 50%
CREDIT SUISSE SECURITIES (EUROPE) LIMITED
EBS Volume Details
35%
30%
25%
20%
15%
10%
5%
0%
Volume from Volume from
non-bank clients Algorithmic Trading
Q1 07 30% of EBS volume was from alogrithmic trading
>
Over $100 bio / day
CREDIT SUISSE SECURITIES (EUROPE) LIMITED
Statistical Trading
Traditional algo trading. Relative value trading, black
box/CTA-style algorithms, macro portfolio models
(cid:131)
Already prevalent. Driven much of the growth in algo trading
Implications
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Hard to add value with traditional sales coverage or FX research
>
Purely a price relationship
>
Growth of quantitative research from banks
(cid:131)
Raises latency issue for banks
>
Growth of auto-hedging and client profiling
CREDIT SUISSE SECURITIES (EUROPE) LIMITED
Auto-hedging
Position Targeting – dynamic monitoring and management
of risk levels
Market
Bank
Bank Auto
Client Makers
E-Platform
Hedging
Market Space EBS Reuters CME
(cid:131)
Bank e-flow no longer managed by traders
(cid:131)
Market makers become position takers trying to leverage flows
CREDIT SUISSE SECURITIES (EUROPE) LIMITED
Algorithmic Execution
Automating trading styles and using technology to work the
placement of trades
?
Reuters
Market
Fills Makers
CME
Bank Algo
Client
Orders routed
E-Platform Engine
Hotspot
Orders
to exchanges
Marketspace
(cid:131)
Algo engine replaces rate engine
(cid:131)
Client pays a transparent commission
(cid:131)
Flows not observed by Sales/Trading
CREDIT SUISSE SECURITIES (EUROPE) LIMITED
Liquidity Access
Optimisation of access to multiple trading venues
Algorithms used to provide DMA to exchange which is providing
best liquidity/price
EBS
Bank Algo CME
Sales
Trading Liquidity
Team Finder
Reuters
Hotspot
Optimised risk clearing for traders in a fragmented market
>
Improved efficiency for market makers
>
Market effectively becomes less fragmented
CREDIT SUISSE SECURITIES (EUROPE) LIMITED