Algo trading presentation - European Central Bank

18 Pages·2007·1.52 MB·English

by  European Central Bank

Algorithmic Presentation to
European Central Bank
Jean-Marc Orlando, EFX Global Head BNP PARIBAS
What’s all the BUZZ about Algorithmic Trading /eFX ?
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Why is Algorithmic Trading Exploding in the industry?
Its Growing because Target Clientele
(cid:132) Technology Barrier is less
(cid:132) Hedge Funds
expensive
(cid:132) CTA’s
(cid:132) As market access grows via
ECN’s anonymity and (cid:132) Proprietary Trading Houses
powerful ability to place orders
(cid:132) Bank Proprietary Trading
are are more easily achieved
Desks
(Prime Brokerage and Market
Access(EBS, Reuters) (cid:132) Corporates
(cid:132) Technological Growth on Buy/ (cid:132) Retail
Sell Side (API’s, processing
(cid:132) Next generation market
thousands of tickets at minimal
makers
cost.
(cid:132) Euros are being made!!!!
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Average Reported Buy-Side Trading Volume by Geography
2006 2005
(cid:132) Global $70.6T 59.0
(cid:132) Europe $42.3T 35.9
(cid:132) Americas $20.5T 16.8
(cid:132) Asia Pacific $ 7.4T 6.1
(cid:132) Asia (ex Japan) $ 5.2T 3.6
(cid:132) Japan $ 1.7T 2.2
Based on Interviews with 1,663 institutions in 2006 and 1,549 in 2005.
Greenwich Associates
33
Adoption of FX Electronic Trading Globally
2006 2005
(cid:132) Trade Online 53% 44%
(cid:132) Plan to Start 11% 13%
(cid:132) Not Considering 36% 43%
2006 Total Reported Electronic Volume = $35.5 Trillion
2005 Total Reported Electronic Volume = $16.9 Trillion
Greenwich Associates
44
Current and Expected FX e-Trading Activity Globally
Current % of Volume 2006 2005 2004
(cid:132) Electronic 60% 53% 48%
(cid:132) Traditional 40% 47% 52%
Expected % of Volume 2006 2005 2004
(cid:132) Electronic 63% 57% 54%
(cid:132) Traditional 37% 43% 46%
Based on responses from 628 instituitions trading electronically in 2004, 679 in 2005, 877 in 2006
Greenwich Associates
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Algo & e-FX proliferate growth in the search for Alpha
$2.5 Trillion Traded Daily from $1 Trillion
Based on research conducted by Client Knowledge 2007 and CK estimate based on recent Fed and BoE data
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How are algo trading revenues split today?
Algorithmic Execution (The art of microstructure trading)
(cid:131) VWAP, TWAP, Time Slicing, icebergs, etc (order routing)
(cid:131) Orders – utilization of client intelligence
(cid:131) High Frequency and Provides Information
(cid:131) Is becoming a source of low margin revenue, radical shift of
strategy in financial institutions offering
Algorithmic Trading (Replacing traditional manpower )
(cid:131) Electronic market Making
(cid:131) Auto Hedging
Proprietary Trading
(cid:131) If I told you I would have to kill you…
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Algo is the vehicle, Market Data the Fuel but what is the cost?
Cost Variables:
Market Data STP Protocols
Real Time Data Compliance
Historical Data MiFID
Connectivity APIs
Infrastructure / Network Algo Maintenance
Latency Tools Algo Creation (Quants)
ECN brokerage IT specialists
E-sales Client Analysis
Back Office Marketing
Security Ticket Processing
Prime Brokerage Order System etc…
=
??
WWhhaatt yyoouu ddoo kknnooww iiss tthhaatt tthhee ffuuttuurree ooff
yyoouurr bbuussiinneessss iiss aatt rriisskk iiff yyoouu ddoonn’’tt
ddoo iitt……..
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Using Algorithms to Increase Business
(cid:132) The Classic approach:
Traditional traders claim to master the feel / instincts to
(cid:190)
make money
Trading behavior can be analyzed using a systematic
(cid:190)
approach
This exercise leads to a list of conditional rules which
(cid:190)
can result in a extremely complex decision tree
Traders process a wide panacea of market information
(cid:190)
that is aggregated by the brain producing a trading
decision:
Visual information (prices, graphs, news, flows) coming from various
(cid:137)
economical sources
Audible information (news, market noises, internal / external flow trading)
(cid:137)
Accumulated information that form a market sentiment (a feeling)
(cid:137)
Everything that can be formulated is a candidate for
(cid:190)
algorithmic trading
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