Transition managers and algorithmic trading

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Clare Piper of ConvergEx Group explains how algorithmic trading can give transition managers an edge

Transition Managers (TMs) must constantly evaluate their implementation strategies and incorporate the latest technologies to continue to improve and remain competitive.


An area of interest for transition management is algorithmic trading (algos). The use of algos is increasing in the broader trading industry but the question is whether algos are effective in transition management, and if so, how to best utilise them.

Algorithms – useful or...?
While transition management comprises a number of areas to master, the implementation/trading phase is critical to the success of an event.
Let’s remind ourselves of a few things:
• Transitions often involve a large number of securities to buy/sell;
• Trades are often global in nature spanning a number of countries, currencies and time zones;
• The TM should have a clear plan for what they want to achieve during the trading phase;
• There is a huge emphasis on best execution and accessing as much liquidity as possible (and the right liquidity) on behalf of clients.


In addition, a good trader needs to consider a number of factors when pursuing best execution – What are the best trading venues to use? How aggressive can I be in the market without pushing the price? How does this stock fit into my larger order?


As such, it is not humanly possible for the trader to process all the information in a transition to provide the same level of efficiency as they could for a handful of stocks. Enter technology solutions and algorithms.


With the large number of algos available, comes the issue of making sure that you
(i) understand what the algos do and the limitations they may have and
(ii) try to select the best one(s) to help seek to achieve best execution.

Use of algos in transition management
At ConvergEx, the Global Transition Management Team works closely with our Financial Engineering & Advanced Trading Solutions Group (FEATS – a dedicated group developing next-generation trading tools and technologies to offer state-of-the-art, global strategies for seeking best execution worldwide) to develop proprietary algos suited to transition management. In doing so, we have focused on the areas designed to try to maximise the effectiveness of transitions.

Accessing liquidity and minimising market impact
Undertaking to keep information leakage at a minimum while accessing multiple liquidity sources for illiquid securities is critical. Illiquid stocks often don’t ‘fit’ more standard algos and the trader either needs to trade them on his/her own or use a tool better suited. Enter ConvergEx’s AbraxasSM.

 

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