Broker-dealers are grappling with the conflicting needs of the buy-side in an algorithmic trading market that grows more complex by the minute.
Buy-side firms have an embarrassment of riches when it comes to algorithmic trading. Gone are the days when buy-side clients would be satisfied by a broker’s ability to provide an algorithm that would govern the buying and selling of a set amount of shares at a price that follows the volume weighted average price (VWAP) or the time-weighted average price (TWAP) benchmarks.
Brokers are competing for the buy-side’s attention with algorithms based on a seemingly infinite number of benchmarks such as target price, market close, percentage of volume, arrival price and so on. TWAP, VWAP and Market on Close and Market on Open algorithms - the alphabet soup of acronyms for algorithms is a sign of how much algorithmic trading has shaken the value chain of securities trading, driving up trading volumes, adding to volatility and forever changing the dynamics between buy-side and sell-side firms.
Some broker-dealers, in a rush to distinguish themselves, have flooded the market with suites of algorithms and services that overwhelm the buy-side with too much choice. This is quickly leading to algo overload and fatigue.
The buy-side has reacted by asking brokers to somehow reconcile conflicting desires — give them everything they want, streamline the offerings and yet keep the intelligence and complexity that distinguishes them. Some buy-side firms have even taken matters into their own hands and have attempted to mitigate their own algo fatigue.