Self-provisioning is a key competitive advantage for buy-side algo providers

June 25, 2024

Key Takeaways

  • Buy-sides both demanding and cost-conscious
  • Sell-side firms must offer differentiated service
  • Self-provisioning delivers flexibility

Buy-side investment firms have increasingly demanding requirements for control and information over order execution. No longer simply focused on outcomes, they are becoming more involved in the detailed process of where and how their orders are traded. This is being driven by several factors including:

  • Compliance/regulatory requirements: Regulations like MiFID II increasingly require buy-sides to provide detailed information about order and trade performance to ensure that they are achieving the best possible execution outcomes for their own clients.
  • Venue selection: With an increasing range of venue types and access to more markets worldwide, there is more choice than ever on where to execute. Buy-sides are keen to take advantage of this choice and seek more information and control over where their orders are executed.
  • Liquidity management: Buy-sides also seek data and insights into order execution to assess liquidity conditions and adjust their trading strategies accordingly.
  • Cost concerns: Insights into execution also allow buy-sides to optimize their costs, both in terms of reducing fees and minimizing the market impacts of their orders.

Despite these demanding requirements, buy-sides remain price-conscious. Sell-side firms face the challenge of offering a differentiated service that is flexible to their clients’ needs while controlling their costs and remaining competitive on price.

Self-provisioning as a potential solution

‘Self-provisioning’ offers a potential solution to this dilemma. The ability to craft customized algorithmic trading workflows allows sell-sides to be responsive to their customers’ specific requirements. Allowing changes to be made quickly and responsively is also key, both in reducing initial set-up costs and allowing firms to quickly change what isn’t working. How can software solutions help enable buy-sides to offer such flexibility?

Different ways to offer a customized service

Sell-sides can offer algo customization at several different levels:

  • Tactical: offering clients the ability to customize or create algo behaviors themselves, giving in-depth control over execution.
  • Benchmarks: allowing customers to define their own execution targets–for example, achieving a certain price relative to market benchmarks like Volume Weighted Average Price (VWAP).
  • Strategic: the ability to customize routing rules and build strategies, allowing customers to combine different algos and decide where, when and how they are implemented.
  • Validation and alerting: offering customized validation rules and warnings allowing customers to set their own restrictions on how algo functionality is used (and by whom).

A comprehensive software solution should support self-provisioning with access to rules and configuration options at all these levels, from routing, to validation, to strategy building. But it’s also important to consider how these options are implemented, as this is crucial to delivering a truly agile and effective self-provisioned service:

  • The ability to make changes in real-time allows strategies to be quickly designed, tested, and implemented, and changes to be made rapidly and responsively.
  • It’s also important to be able to implement changes at scale through file uploads or an API. Using industry-standard file formats and technologies goes hand in hand with this, as it reduces the barriers to implementation. It also makes it easier to ingrate self-provisioning into wider workflows and allow clients access to the innovations of your algo providers.
  • Automated exception handling, which allows sell-sides to maintain a seamless low-touch service, even if issues occur, is also a key factor, as it helps to ensure a reliable service and reduces the need for costly manual interventions.

Offering a differentiated and flexible algo trading service is becoming a key requirement for sell-side firms. Choosing solutions that enable agile self-provisioning across the order lifecycle offers a cost-effective way to deliver this.

ION Markets

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