technology in the execution world,
with providers increasing the range
of algorithms being offered, there
are potential negatives to this.
BNY Mellon’s Pershing uses six or
seven different algorithm providers right now. The company has
not jettisoned anyone because of
weak algorithms. On the contrary,
says Horan, he is happy with the
algorithms provided the company
and, indeed, says there is a danger
of things becoming unnecessarily
complicated these days.
“There is only so much maximum
“It is hard for any algo to adjust where liquidity
performance you can extract,” says
Horan. “There does seem to be an
arms race on in algos. Some firms
will give you an algo rack with 25 al-
gos on which is way too confusing.”
Some have, indeed, criticised
things like intelligent switching
techniques which can potentially
deviate from the original execution
objective of a broker as well as
making it harder to measure algo-
rithms against each other.
Algorithmic development is un-
likely to stop any time soon to deal
with the new market complexities
fuelling the arms race further. It is
a fast-developing environment and
one that requires all measures to
stay on top.
follows an episodic or erratic pattern.”
MICHAEL HORAN, HEAD OF TRADING SERVICES, BNY MELLON PERSHING
How does one best measure an algorithm’s perfor-
mance? By all accounts it is not always a simple task.
Algorithm transaction cost analysis (TCA) has been
criticised as a poor science and many believes that
algorithm benchmarks are being abused by gaming
practices that make individual algorithms look good.
“The state of Algo TCA is pretty abysmal” says
Henri Waelbroeck, director of research, Portware.
“It measures performance to a benchmark—but the
question is the performance of what? Orders are of-
ten modified by portfolio managers or merged with
other orders by the trading desk – without taking
the stream of instructions into account TCA be-
The solution, says Waelbroeck, is to construct a re-
alistic baseline price for blocks by tracking the stream
of portfolio manager instructions and order merging
requirements, then allocating results—the realised
price against the baseline—back to portfolio manager
orders to account for costs for each portfolio. A