By Andrew Actman
Lightspeed Chief Strategy Officer
One of trading’s primary tenets is to follow the big dogs. Whether this means finding the axe on your Level 2 screen in the stock you are day trading or following institutional money flows, knowing what the big dogs are doing and thinking is key to success in the market. Unquestionably, the biggest dog on the financial playground is Goldman Sachs. This venerable investment house weathered the financial crisis by using innovative tactics to create value where others saw only liability. Goldman has emerged as the major player in the electronic trading space. Recently, Ingrid Tierens, co-head of the electronic trading strategy group at Goldman Sachs Electronic Trading, let her views on the future of electronic trading known to Traders Magazine. Here we will distill the primary points Ms. Tierens made to Traders Magazine so you can better understand Goldman Sachs’ view on the future of electronic trading, and by extension improve your own trading.
Ingrid Tierens spoke about algorithms, execution quality and venue toxicity. Let’s start out by looking into Goldman’s view on venue toxicity. Venue toxicity is a series of metrics that compares one trading venue to another. Basically, it is looking at things like bad fill ratios and whether or not the price of a stock is moving against the trade or not after execution. Knowing these metrics allows Goldman to create smarter routing engines that can quantitatively decide to what venue to send each particular trade for the optimal results.
She further explained that the new trend in algorithmic trading was one of transparency. Goldman is becoming more open about how their algorithms function in the market. It is even going as far as providing analysis for specific clients so that they can better understand how things work together. The examination of execution quality is becoming far more detailed. Ingrid told Traders Magazine, “We examine price dynamics around a client’s order flow. A couple of years back a typical report would mainly tell a client his shortfall relative to when the order originally came into the broker and whether the stock either moved up or down during the rest of the trading day. Now, we look at orders in much more granularity and examine price movements relative to the first execution, relative to the average execution and to the last execution. We check to see if there is momentum or reversal and if we are actually impacting the price by trading too aggressively. We are going into much more detail beyond what a client might have been satisfied with a few years back.”
Basically, Goldman sees electronic trading’s future as more detailed and more personalized. The metrics are getting tighter and tighter while each client is having the algorithms tweaked specifically for their needs. This trend will likely filter down to all levels of the electronic trading space.
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