July 2019CIOAPPLICATIONS.COM9The usage of market microstructure model and dynamic programming technique makes a number of well-known optimal decision concepts become the natural outcome of LOPM in a quantitative manner:1. Opportunistically cross spread when spread is tight or market is moving in the same direction as our trading2. Remove the order from the market if the market trades have significant adverse selection or market is moving in the opposite direction as our trading3. Step into the spread to improve fill probability while still capturing spreadOnboardingFIX connectivity/Vendor certification/Client onboarding is one of the most crucial elements to get right in the electronic trading business. Proper certification reduces number of issues down the road. Proper set up of FIX connectivity and tag translations creates a positive client experience, with reduced number of rejects and erroneous algorithmic behavior. In addition, expedited response to FIX inquiries enables electronic sales and coverage to respond to clients' demands in a timely manner.CustomizationNo two buy-sides' needs are exactly the same. Modern, competitive electronic trading offerings are required to deliver customized solutions tailored to each client's specific trading preferences.With growing sophistication of quantitative models and ever-increasing electronic solution varieties, buy-sides face a unique challenge: how to choose a product that is straightforward to use and yet easy to customize. The first question you should ask yourself when you evaluate a provider's electronic offering is whether they have the capability to quickly customize their product to meet your requirements and what level of customization can they achieve. There are three types of customizations: 1. Customize within a particular algorithm and adjust parameters and behaviors based on price, time, or other market conditions; 2. Customize cross algorithms, i.e., switching between different algorithms based on certain signals or market conditions; 3. Bespoke algorithm offering based on buy-sides' specifications.All need to be done overnight, if not intra-day, to enable buy-sides to take advantage of market dynamics as they occur.On top of that, you need to build a flexible experimentation framework that allows you to conduct A/B test and an advanced analytics framework that enables generation of performance statistics easily. Only by doing so you have a complete circle of capabilities for a modern customization framework.ServiceElectronic trading is a "low-touch" business with "high-touch" service. The most competitive service model would be a combined approach of low-touch speed to market and high-touch level of consultancy. As the number of providers, algorithms, and venues grow, it is increasingly important for sell-sides to provide high level of customer service to their electronic trading clients. In order to deliver "high-touch" service, you need to have proper sales trading tools, capable FIX support function, and dedicated algorithmic support staff to answer buy-sides' inquiries on the fly.What is "high-touch" service? · Stay on top of your trade blotter and watch your orders closely: orders that are not executing, orders that are falling behind the schedule, performance (slippage against Arrival, interval VWAP, etc.), orders that are causing impact, orders that are getting poor fill rates, stocks that are on the move, etc.· Response to IB messages should be instantaneous· Most importantly, catch things that clients care about (even if it is not good news) and catch it before clients catch it· Provide actionable suggestionsAn algorithmic product is only as good as the people behind it. "High-touch" service means your algorithmic coverage is clients' eyes and ears, and provides them with value-added information in a frequency acceptable to them.Enabling/papering client is step 1. Getting client to trade is step 2. Retaining and increasing clients business is step 3. Simply getting client to send an order on auto pilot mode is not something that will retain clients, and more importantly increase clients' flow. Explosion of fintech partnerships, data, analytics, cloud computing, and other digital technologies has dramatically enhanced private equity firms' ability to streamline core business processes
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