Don’t Take Your Horse On The Highway

Last month, in an interview with Risk.net, our co-founder and President, Robert Almgren, spontaneously came up with an analogy that has since stuck in the thoughts of the QB team. When you are as immersed in a product as we are, it can become increasingly hard to explain concepts that are obvious to us, but newer to others. “Don’t take your horse on the highway” is analogous to two things: 1) manually trading in today’s listed markets without the use of algorithms to assist with your execution, 2) a resistance to change from OTC trading with a dealer to the alternative of electronic, central limit order book liquidity. The point for both is that if you have the right technology, you can be effective and thrive in a modern trading ecosystem. You just need to rent the automobile that let’s you drive safely at high speed, and leave your horse at home. The high performance automobile is what QB offers in execution for the markets we cover.

The CFTC has published a very interesting white paper on automated trading in futures markets. Using CME data, they have detailed the percentages of manual vs. automated trading by product group. (The table below is an extract from this report). Automated trading is a significant percentage of market volumes, is still growing across the board, and particularly in commodities. 48.5% in Agriculture (up from 38.1% in the previous report 2 years earlier), through to FX seemingly saturated at 82.7% (slightly up from 79.9% previously).

If you are trading in these markets manually (without an execution algorithm) then you are mostly likely interacting with machines. If you do not use a robot to assist you, it is going to be hard for you to win the game. A human trader simply cannot react to the fast pace nature of the market microstructure – rapidly reading changes in market data, swiftly replacing orders at the exchange, managing multiple orders, etc. The modern trader can instead arm him- or herself with advanced tools and augment their abilities. Just bear in mind that algorithms are certainly not equal – there is a wide ranging difference in capabilities and performance by different types of execution algorithms. It’s QB’s mission to provide the most sophisticated, best performing execution algorithms we can to compete with the most advanced algorithms also operating in the market.

Regarding the second analogy, we believe fully electronic markets and transparency in particular, are a good thing. Robert, and the QB team, believe that the broader shift in fixed income from OTC to electronic markets will ultimately reduce slippage for everybody. Trading costs for equities have declined substantially over the years – we believe there is a similar path forward for fixed income. We are here to help traders put the horse out to pasture.

Quantitative Brokers
New York
August 28, 2017