A sensible request deserves a sensible response

The German government and the European Commission want to mandate earmarking of every algorithmic order in order to identify the originating strategy. The reason being that market supervisors have a difficult job keeping up with all those technical innovations in financial markets. In the good old pit trading days traders were restricted by physical limitations, but in a world where electronic networks allow investors from all around the world to meet in virtual marketplaces things are more complicated. With traders now able to control many different pieces of software that allow them to multi-task like never before, the call from market supervisors for greater transparency is sensible.

There are many reasons why brokers strongly object to earmarking every distinct algorithm, as seen in the discussion that followed my recent blog on German’s HFT ruling. Most noteworthy is the difficulty of defining a strategy. A trading strategy can be anything from the old “buy low, sell high” approach, to a trader’s gut feeling, a synthetic order type or a mathematical model put into a black box. Thus, regulators would have to go through the painful process of defining what they mean when they talk about a strategy, while brokers would be burdened with the considerable overhead of trying to manage all that complexity. This seems far from sensible to me.

In one of our previous discussions, it was suggested that following the approach taken by the Chicago Mercantile Exchange with their Tag 50 IDs and FIX Tag 1028 would be a good idea. Requiring end-user registration and an algorithmic trade flag seems to be much simpler. If anything, it would get rid of the need to define a trading strategy. Without digging into the details, it would be nice to see harmonisation across the pond. Certainly, an end-user flag might not be as granular as an algo identification because one end-user may use many different algos, but implementation costs would be significantly lower. Most trading strategies are, after all, designed to make a trading profit for the end-user. Supervising at the end-user level seems eminently sensible to me as the modern day equivalent of looking over the shoulders of the good old pit traders.

3 Responses to “A sensible request deserves a sensible response”
  1. Bruce Bland says:

    To my mind the German ruling is along the right lines, but it can be argued that it does not go far enough. Knowing the name of the originating algo may help matters, but as many algos send slices to sub algos (often referred to as execution algorithms) knowing which model was to blame for a particular market order at a given time will still be difficult to ascertain.
    A more sensible approach may be to have a FIX tag that contains all algorithm names that the order went through on its way to the market, ie VWAP, AGGRESSIVE, SOR. This string could then be decoded by the exchanges, and more importantly by the regulators.

  2. Christian Voigt says:

    Hi Bruce – I find your proposal from a product perspective very interesting. However, with a “regulation hat” on, I’m not sure whether it is the right path forward. I have the following concerns.
    Firstly, your example of “VWAP, AGGRESSIVE, SOR” highlights an additional level of complexity that I didn’t see before. When defining an algorithmic order it is not sufficient to name the originating algo but it must also include any closely related system. I would say you just provided another reason why brokers may deem this approach too complex.
    Secondly, legislators would have to draft a text that would implement your simple example across all trading applications. I assume it is already difficult to define all possible flag combinations across all possible Fidessa workflows. But any legal text would have to be broad enough to cover all possible trading systems, while precise enough to achieve a consistent application in Europe. I’m doubtful whether this can be done.
    Thirdly, market supervisors have to be able to make use of the data. Providing huge amounts of additional data to supervisors is only helpful if they can exploit it. Otherwise, it is just waste. Considering all the complexity in markets already, I’m sceptical whether real-time market supervision can utilise something as difficult as a “VWAP, AGGRESSIVE, SOR” flag.
    To summarise, I agree with you that all this information should be available in the trading system, if requested by the market supervisor. But, I don’t think it should be provided to them with every single message sent to an exchange. I believe it is too complex to be part of any real-time surveillance system.

  3. Christian Voigt says:

    At the last CFTC Public Meeting of the Technology Advisory Committee, a working group represented their results in regard to flagging algorithmic orders. The presentation is definitely worth while reading.


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