Algorithmic trading can lead to large swings in trading positions, which if not properly monitored and controlled, can also produce large losses.
That’s the premise behind the automated capital commitment feature that Barclays is making available through select equity algorithmic trading strategies for U.S. clients. The idea is to allow clients to partner with Barclays in creating liquidity and transferring risk.
“Buy side clients are concerned about workflow issues associated with reductions in staffing on their execution desks,” said William White, head of equities electronic trading at Barclays. “This capital commitment tool alleviates concerns about workflow and market impact.”
Hedge funds appear to be moving aggressively to reduce costs associated with their trading desks in the midst of a prolonged period of depressed trading activity, according to a 2012 study by Greenwich Associates of head traders and traders at a variety of buy-side institutions, including asset management firms, corporate treasuries, pensions, endowments, hedge funds, banks and insurance companies.
Greenwich Associates asked participants about the organizational structure, staffing levels, budgets and operations of their trading desks.
Forty-four percent of hedge funds participating in the study said their 2012 trading desk budgets were reduced from 2011, with approximately 40% reporting flat budgets and 17% reporting increases.
Those results suggest that hedge funds are moving much more aggressively than other types of institutional investors to adjust the size and cost of their trading desks in response to a general slowdown in securities trading activity.
“Trading profits have gone down dramatically, and a lot of firms are exiting the business as a result,” said the head of a West Coast hedge fund that employs algorithmic trading. “The overall environment for algorithmic trading is less attractive than it was several years ago.”
With the capital commitment feature enabled, a portion of the client’s order is eligible to be transferred to Barclays’ central risk management book, thereby providing the client with instant liquidity as well as saving them the execution cost associated with that portion.
“Certain algorithms tend to have a sizable market impact,” said White. “We work with each client individually to determine at what threshold the capital commitment feature should be activated. Once the market impact crosses that threshold, it activates and the risk is transferred to our cash desk, which works the rest of the order, using their expertise to minimize market impact.”
Barclays soft launched the feature with a small group of clients with positive feedback. Seven clients are currently on board with the new feature, White said.
“Our early adopter clients have seen significant improvement in the average execution price of their algorithmic orders with capital commitment versus without,” said White. “We are simplifying clients’ work flow, liquidity capture and execution risk management, all at the push of a button.”
Barclays plans to roll out the automated capital commitment feature next in EMEA as part of the ongoing development of its global electronic trading platform.
