Algo wheels have gained real traction among traders, and more growth is expected, according to a new survey — even if users might have trouble articulating exactly how an algo wheel works.
Ivy Schmerken, editorial director for Flextrade, explains the benefits of algo wheels in this blog post published in FinExtra:
“While algo wheels have gained traction in equities, in futures it is a more recent development and it points to how the buy side is embracing the most advanced tools to automate and achieve optimal execution with an actionable feedback loop,” said Marco Bianchi, head of business development for futures at FlexTrade Systems. “Over time it becomes a more optimized data-driven approach,” said Bianchi.
A recent study by Greenwich Associates estimated that 22 percent of clients are using algo wheels for as much as 36% of their order flow. Greenwich’s Richard Johnson, vice president, market structure and technology, predicted that algo wheels “will increase from a fifth to a majority in a few years, “at the FIX Trading Community’s Americas trading briefing, as reported by Global Trading in in “Algos Gain Steam.”
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“It’s not surprising that algo wheels are being applied to other asset classes. This was always been the intention for FlexTrade when it built the product,” said Alistair Cree, product manager, TCA, Analytics and Algo Wheel at FlexTrade.
“We’ve seen trends particularly in quantitative finance spread from equities to other asset classes. That’s certainly been true of TCA [transaction cost analysis] and that’s been true of many forms of electronic execution,” said Cree. “And so, we were always expecting the algo wheel to move into additional asset classes like futures,” said Cree.
An institution that is trading equities as a direct investment has an opportunity to bring the futures desk onto the wheel. “When a firm is trading futures as a hedge against equity trading, then the futures wheel is an easy way to automate that in an intelligent way,” noted Cree. “Clients need to have enough order flow to produce enough data to make the analysis meaningful, and they must have rigorous testing,” said Cree.
