Though trading algorithms might seem to be the apex of mathematical logic, traders are more likely to use their gut instinct when selecting or getting rid of an algo, rather than performing a scientific analysis. That was the consensus during a panel discussion Wednesday afternoon at the TradeTech conference in New York City.
Speaking on a panel entitled “Elusive Liquidity: Perceptions, Myths & Realities,” Owain Self, global co-head of direct execution at UBS, said to rigorously test an algo in a scientific manner requires a huge amount of experience and special controls in place.
“What the vast majority of our clients do is base their judgment on the look and feel of how an algo works,” Self said. “Trader intuition is still something that drives a lot of choices that the traders make.”
That sentiment was echoed by Christopher Willox, director of trading for Fenimore Asset Management. He said he tends to use an algo so long as it appears to work. If performance falls off, he’ll start mixing and matching algos, but there is no set standard for when he will stop using an algo, other than a feeling that it has ceased to work.
“If it’s not fulfilling my needs at the time, I’m going to throw it out the window,” Willox said.
Eldar Nigmatullin, senior quantitative trader at AllianceBernstein, said the buyside traders have plenty of tools available, but there remains the question of how they choose their tools to use. He said that in the future, there will be more analytics available to the buyside, so they can make better decisions about their algos. Unfortunately, we’re not quite there yet, he added.
When the panel asked the audience of traders how many of them felt they had a rigorous and scientific approach to selecting algos, one trader responded, “well, sorta.” No one else claimed to have such an approach.
