Just because a trading firm doesn’t write its own trading algorithms, it doesn’t mean that it needs to give up the benefits of customization.
When Matt DeSalvo, managing director, head of US equities at Mizuho Securities, joined the company in September 2014, he found the brokerage using a suite of white-labeled trading algorithms from a popular, but unnamed, provider.
DeSalvo looked for an alternative supplier to lessen his group’s exposure to reputational risk almost immediately, he said.
Just before joining Mizuho and during the following months market regulators fined Barclays, Credit Suisse, and ITG $70 million, $60 million, and $24.3 million respectively over their dark liquidity pool practices.
"The industry has seen three of the market leaders receive enormous fines," said DeSalvo. "We’re trying to build a brand new business and I had no idea which algo provider was going to be next.”
This left him with the option of writing his own trading algorithms or select another provider. DeSalvo did not find either choice palatable.
Mizuho has not had a history of writing its own algorithms and selecting another algo provider still expose the business to knock-on reputational risk if the provider runs afoul of regulators, he explained.
Also he found third-party algorithms a little limiting since Mizuho could not make changes to the individual algorithms or the order routing tables that they use.
After a few months of examining other providers, DeSalvo selected to license quantitative-trading technology vendor Pragma’s suite of trading algorithms, which Mizuho can tailor to its needs.
It took Mizuho approximately six months between the legal paperwork and physically implementing the algorithms on to the firm’s system before going live on the new offering.
“Even if Pragma provides its product to another broker dealer, each dealer is able to put their own fingerprint on it,” explained DeSalvo. “We're using the same thing, but can select different routing destinations or they allow us to tweak it so that it is customized to us.”
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