Workflow automation through algo wheels – counting the costs?

The demands and expectations of buy-side firms are constantly driving change in low-touch order management. Buy-side firms increasingly seek a bespoke low-touch service and specialist order handling logic. There is a growing expectation for access to a wide range of algos and the desire to combine algos in increasingly complex ways. For the buy-side, algo switching has become a mainstream trading practice.

The buy-side is taking an increasingly active role, with a range of factors (including regulatory requirements) leading to demands for wide-ranging detailed order performance and analytics data. Without this information, it is challenging to demonstrate the achievement of the best execution to both clients and regulators.

However, these increasing requirements for customization, feedback, and control exist alongside a perennial pressure — to minimize costs. The guiding principle of low-touch has always been to deliver efficiencies through automation, and all other innovations in the space must take account of this. For sell-side firms, the challenge is to provide a personalized service while rigorously controlling the costs of doing so.

The price of delivering a personal service

Both buy- and sell-side firms have embraced algo wheels as a solution to meet the aforementioned requirements. There is no standard definition of an algo wheel, but they are generally understood to include the following features:

  • Support for multiple algorithms within a single technology platform.
  • Automatic switching of order flow between different brokers and algos.
  • The ability to collect execution data and analyze order performance.

By automating the process of algo-switching and incorporating data-driven order analysis, algo wheels promise to deliver both efficiency and continuous improvement. But there is a range of factors to consider when selecting an algo wheel platform. Firms must not only consider how to meet the demanding requirements of the low-touch landscape but also assess how proposed solutions will affect execution costs.

The ability to offer personalized order management logic is a key selling point for algo wheels. However, these benefits need to be balanced against potential implementation costs. Delivering bespoke order management logic for multiple customers can easily result in high maintenance overheads. For example, if customizations are made in the codebase, extensive testing is necessary to avoid unpredictable results. It can therefore be difficult to turn around solutions quickly. An effective algo wheel platform should include tools to both implement new logic and maintain your existing extensions. Ideally, the platform should allow you to construct complex, multi-phase execution strategies without creating an impenetrable thicket of custom logic.

Managing exceptions and interventions

Flexibility is another key factor in driving down costs. An algo wheel platform should not only allow rapid customization of automated processes but should also offer traders the ability to intervene manually where necessary. For example, allowing traders to take advantage of internal crossing opportunities can help to reduce your overall transaction costs.

Effective error handling is a vital component of any platform. Wherever possible, exceptions should be automatically handled; for example, ‘parking’ orders received outside of market hours before releasing them. In other cases, manual intervention will be required. The platform should quickly highlight exceptions to traders so they can take remedial actions. The combination of automated exception handling and effective manual intervention helps to minimize the costs associated with errors and exceptions.

Conclusion

Algo wheels are potentially incredibly powerful tools, allowing more profound and effective collaboration between buy- and sell-side firms. But when choosing a platform, it is crucial to examine exactly how it will enhance your order management offering and whether it will help to reduce execution costs.

If you are ready to discuss how ION can help fulfill your requirements in this area, contact us at [email protected].