Orc Software Algorithmic Trading

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Orc Software Algorithmic Trading

• Nils Nilsson
• Founder of Orc Software

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Algorithmic Trading, AT

• AT differs from pure Direct Market Access which
  by nature is non-discretionary
• AT is discretionary by nature, although execution
  is left to computer algorithms
• Replaces human Sales Traders

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Orderflow Trends

• Discretionary orders are preferred method by fund
  managers
• DMA will increase in relative terms (high
  intensity hedge funds), primarily for liquid
  securities

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Key Question

• Where does the logic reside?

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Disparity in Interests

• The Buy Side prefers the algorithms on their side
  in order to protect intellectual capital.
• The Sell Side has the same interests.

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Disparity in Interests

• The conflict creates possibilities for new
  strategies for the brokerage community

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Who Are the Largest AT Players Today?

• Citadel Investment Group
• Interactive Brokers
• Credit Suisse First Boston
• Deutsche Bank
• Goldman Sachs
• Lehman Bros.
• Morgan Stanley
• Susquehanna Investment Group
• UBS

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Who Are the Largest AT Players Today?

• The market includes software developers, such as
  Orc Softwares Orc Liquidator

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Trends...

• Computers do at warp speed what traders used to
  do by hand, for example auto-quoting of options
• A growing percentage of order flow arrives via
  computer to computer APIs.
• The FIX Standard has vastly simplified this
  connectivity

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Trends...

• Proprietary trading systems can bombard an
  electronic trading system with massive rates of
  orders/second
• Automated trading systems already account for a
  majority of the volume on the electronic equity
  and options markets
• The bandwidth is under pressure

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Trends...

• Trading costs are being slaughtered!
• Buy side trading is becoming more complex
• Various asset classes simultaneously
• More sell side firms offer algorithmic trading
  functions in order to attract trading flows
• More OMS vendors offer algorithmic trading
  functions

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Trends...

• A massive growth in the ratio order to fills
• Central order books are sometimes too slow
  during peak activity
• A new way of designing the next generation market
  place and trading technology

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AT Components

• Real time and historical market data
• Algorithms to
• Perform correlation analysis
• Identify trading opportunities
• Determine optimal timing to launch
• Measure trade execution against benchmarks (VWAP
  TWAP, etc.)
• Order management/order processing

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AT Components

• Connectivity to liquidity pools
• Exchanges, ECNs, inter Exchanges, ECNs,
  inter-dealer brokers, etc.
• Integration with internal systems
• Trading
• Order Management
• Risk Management
• Compliance
• Back Office

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Challenges for the Future

• Dealing with a massively higher transaction
  volume
• Achieving true STP is a necessity
• Technology changes must, however, go hand in hand
  with market structure changes
• Erasing the border between the Sell and Buy side