Trading Systems. Horses for Courses

In golf, “horses for courses” means that some golf courses favor certain types of golfers, while other types of golfers will prefer different types of golf courses. In other words, when a golfer can match his or her particular skill sets to a golf course whose layout and design favor those skill sets, that golfer will have a better chance of performing well. Makes sense, right?

As opposed to retail traders, when buy side institutions want to trade, most of the time, they do not get an instant execution, and have no idea what the ultimate price that they are going to be able to buy or sell at. Even on the buy side, investment firms come in all shapes and sizes, from small quant teams to multinational corporations managing billions of dollars. What is clear is that reliance on trading technology is only increasing in the modern investment management arena.  They are also using sophisticated algorithms for portfolio optimisation, identifying the optimal mix of assets to maximise returns while minimising risk, based on factors like historical performance, volatility, and correlation between asseets.

Algorithms are increasingly being used by long only funds to monitor and manage portfolio risk, assessing exposure to market, sector, or currency risks, and making the necessary adjustments to maintain the desired risk profile. Reducing market impact is just one of the reasons for the growing popularity of algo trading amongst long only fund managers. Other factors, such as lower costs, ease of use, speed of execution, access to multiple liquidity sources, anonymity, firm/desk-specific customisation, and flexibility around how orders are routed into the market, as well as increased trader productivity and consistency of execution performance, are all contributing to that growth.

The choice of trading strategy will reflect the broader investment strategy – and may be influenced by specific factors of the marketplaces in question. A proprietary trader will have different needs than those trading on an agency basis. Arbitrage or pair-trading strategies also require similar base parameters. Conversely, a long-term buy-and-hold investment decision might tolerate a fraction less precision in the stock’s initial acquisition price – but the size of the trade might engender liquidity issues, potentially adversely and consequently moving the purchase price. Traders’ benchmarks (which permit a judgement of the trade execution) thus vary and fundamentally (and most important to traders), this impacts how the traders themselves are judged as a consequence.

There’s no doubt that institutional trading is a complex field that requires extensive training and many years of experience to understand and implement effectively. However, it is also an exciting one, with new developments and applications emerging at a rapid pace. We look forward to partnering with you on the journey.