Matt Saul, Head of Trading Asia ex. Japan at Fidelity Worldwide Investment looks at the changing technology of algos in Asia.
How has increased algo trading affected market microstructure across Asia?
We’ve seen market microstructure changing partly as a result of algo trading but also as exchanges reduce spreads and change rules to facilitate growth in trading volumes (read HFT and general quantitative trading). This in turn has triggered algo providers to further evolve their strategies, all of which seems to be resulting in less (and more ephemeral) displayed market liquidity.
Our usage of algos made a step change higher several years ago, it has been relatively stable since then, but still accounts for less than half of our total activity. The nature of algos being used however has certainly evolved over the last few years, with more vanilla strategies being refined to suit our traders styles and greater use of what I guess you’d call opportunistic strategies. Tools for monitoring trading (algo and more traditional) have also greatly improved as has “live” TCA, although using this data to improve future trading outcomes has to date proved challenging.
How this change affecting the trading desk decision process between self-directed flow, high touch and block trading?
As discussed, the ratios of our activity are relatively stable. Barring some radical new development the most likely trigger for a further sharp rise in share might be another marked downturn in markets. This would reduce market turnover, probably trigger further cuts from brokers “high touch” desks, further degrading their offering and making it more likely that we would not chose to pay the commission premium, instead relying on our own capabilities.
What comes next?
I think given the current high level of regulatory change, most brokers and clients are merely struggling to keep their existing strategies “compliant” and ensure that they adapt to changes in market microstructure. Developing markedly new strategies seems to be something for a more profitable time in the cycle. The biggest open strategic question for the sell-side, which has made tentative steps toward merging different channels, is as to whether they really embrace this change in a disruptive way and try to recapture some value of anonymity and liquidity access that they previously gave away (almost unwittingly) with the development of “low touch” desks in the previous decade. My other forecast is for somebody to attempt more intermediated “dark” (grey) block crossing facilities.
The Changing Nature of Algos In Asia
