Neil A. O’Hara, author and journalist, writes about financial topics including hedge funds, trading and securities services for a professional and mainstream audience. Mr. O’Hara is the author of record for the 6th Edition of “The Fundamentals of Municipal Bonds” (John Wiley & Sons, 2011).
Algorithms have come a long way since the early days when traders used simple volume weighted average price (VWAP) routines to facilitate execution in large cap stocks. Technology has helped, of course; computers can now process so much data in near real time that programmers can incorporate feedback from the market to alter the way algorithms execute or route orders on the fly. Attitudes toward algorithms have evolved, too.
In an ideal world, no trader would ever betray a directional bias by crossing the bid-offer spread. Better to sit on the bid—or lurk in dark pools, where execution is often at the mid-point between bid and offer, revealing nothing. Time is of the essence, though, and delay increases the opportunity cost if the price moves against the trader. Little wonder that as market volatility has tumbled in recent months dark pools have grabbed a bigger share of volume in US equities.
The interest rate swaps market is huge. The Bank for International Settlements (BIS) tallied $379trn in notional amount outstanding in June 2012 (the latest available data), almost 60% of the total for all OTC derivatives. However, take up by traditional asset management firms has been slow.
