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Algo trading presentation - European Central Bank PDF

18 Pages·2007·1.52 MB·English
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Algorithmic Presentation to European Central Bank Jean-Marc Orlando, EFX Global Head BNP PARIBAS What’s all the BUZZ about Algorithmic Trading /eFX ? 11 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!!!! 22 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 55 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 66 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… 77 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…….. 88 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 9

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2. Why is Algorithmic Trading Exploding in the industry? Target Clientele. Its Growing because. ▫ Technology Barrier is less expensive. ▫ As market access
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