Algo prudence on the rise for the buy-side as published in the Trade News 30.11.12

European buy-side traders want tighter controls on algorithmic trading after high-profile errors this year and are divided on key elements of MiFID II, according to Anita Karppi, managing director of Alpha Trader Forum (ATF).

The ATF, which is organised by Karppi, runs a number of buy-side-led forums – with events this year taking place in London, Paris and Stockholm – which bring the industry together to discuss and gauge opinions on key issues.

With a number of high-profile trading errors making headlines in recent months, the buy-side has registered increasing alarm over algorithmic trading and has redoubled efforts to insulate trading activity from possible negative events, according to Karppi.

“Buy-side firms are concerned about the amount of money that can be lost through problem algos. This year has seen a flurry of problems with algo trading, but the Knight glitch has worried the buy-side more than the 2010 flash crash or the Facebook IPO,” said Karppi. “There’s definitely a growing trend in buy-side algo use, but traders don’t simply want to programme algos to do their trades, they want increased monitoring and controls and tighter failsafes built into algo strategies.”

She adds that headline-grabbing events have spurred CEOs, CIOs and CTOs of trading firms to take a keen interest in algo trading and ensure adequate checks are in place.

But despite the growing wariness, Karppi cites figures from an ATF event in London earlier this year highlighting buy-side traders’ widespread uptake of algorithmic trading. The results showed 86% of buy-side traders used algos, with 89% considering them to have a positive effect on execution performance. Just over half of algo users were customising the tools or using strategies developed in-house and 42% were only using standard broker algos.

Another major issue facing buy-side trading desks according to Karppi is the impending Europe-wide MiFID II directive and its attendant regulation. High-frequency trading (HFT) is one area MiFID II is set to clamp down on with venue-administered order-to-trade ratios, a minimum resting period for all orders and harmonised tick sizes included in the version of the directive unanimously agreed upon by MEPs in October.

But Karppi says buy-side traders attending her events this year have been divided on the true effects of HFT, with exactly half of French buy-side traders surveyed at an event in May saying it wasn’t right for HFT firms to be singled out in regulation.

Also, 56% of respondents at the same event said they didn’t want new rules forcing HFT firms to become market makers, which could potentially create unforeseen problems for markets.

The Parliament’s version of MiFID II also seeks to reduce OTC trading, stating that “...in order to guarantee the quality of the price formation process it is appropriate to limit the circumstances in which OTC trading can be carried out outside a systematic internaliser.” However only half of French buy-siders polled at Karppi’s ATF event in May believed MiFID II would reduce the amount of OTC trading in Europe.

“While the buy-side recognises major changes will have to take place when MiFID II finally comes into force, there has been mixed reactions on key elements such as OTC trading and reducing HFT. Other parts of the new rules, like establishing a consolidated tape have seen a much more unison reaction,” said Karppi.

Another growing trend was a divergence in use of commission sharing agreements (CSA) across Europe, with ATF poll results showing only 11% of Nordic buy-side traders using the tools to pay for broker services compared to 73% of France-based buy-side traders.

In the UK, the use of CSAs is set to rise following a crackdown by market regulator the Financial Services Authority on the bundling of fees for services, such as research and execution.

“The buy-side is split on CSAs. Some believe the sell-side is pushing them and don’t think they add adequate value to the trading process and others believe they create a more level playing field for market participants,” said Karppi.

Next year ATF will host an EU summit for 60 senior and head traders from across Europe, in addition to various events in Germany, France, London and Northern Europe.

Richard Henderson020 7397 3820 This e-mail address is being protected from spambots. You need JavaScript enabled to view it