How Hedge Fund Clients Are Pioneering Sophisticated New Strategies with Automated Trading By Jason Giunta, Managing Director, Head of Hedge Fund Sales, Tradeweb
New York, NY
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October 11, 2023 05:30 PM Eastern Daylight Time
Automated trading has emerged as a strategic edge for a specific segment of the institutional marketplace, employing it effectively in their systematic trading approaches. While this may not be the use case we envisioned back in 2012 when we launched Automated Intelligent Execution (AiEX), we’re certainly energized as our hedge fund clients embrace the tool to innovate, potentially steering it in new directions.
This particular story involving AiEX evolution follows a similar trajectory to what we’ve seen with tech developments in other industries. Whether it’s the explosion of AI and algorithmic models made possible by the widespread availability of cloud-based computing, or the proliferation of offshoot businesses and marketing strategies that have grown up around social media, the full power of a technology isn’t always clear until end-users start experimenting with it. It’s also a classic example of what can happen when you put a reliable, flexible tool in the hands of some of the world’s most sophisticated traders.
Traditionally, systematic execution strategies were primarily associated with equities, where high-frequency trading and algorithmic strategies gained prominence. However, with the advancement of technology and sophisticated algorithms, automation has extended its reach into asset classes that were historically challenging to navigate with automated strategies. This technological leap has paved the way for systematic equity-focused firms to diversify their strategies and venture into fixed income asset classes.
The surge in automation adoption in interest rate swaps is a great example of the transformative impact technology has had on financial markets, allowing for faster and adaptive trade executions. Additionally, automated systems can continuously monitor and adjust trading parameters based on changing market conditions. As more systematic funds expand their reach into fixed income, leveraging automation allows them to deploy proven strategies, optimize trading processes and capitalize on new opportunities across diverse asset classes.
Since launching AiEX we’ve expanded our solution to 26 of our products to help our customers capitalize on strategic trading opportunities, increase their reactivity to market conditions and streamline and expedite their workflow.
Roots In Efficiency
By way of background, AiEX works by linking a client’s order management system (OMS) directly to the Tradeweb platform and fully automating the execution of a trade. At the basic level, the technology automatically applies pre-configured conditions, such as price tolerance thresholds, minimum number of quotes required to trade and client-specific compliance thresholds. The trade is then executed at the best price and sent back to the client’s system.
In its earliest incarnations, AiEX was specifically marketed as a tool to free up traders’ time by automating low-touch trades of U.S. Treasuries. Trade sizes were relatively small, volumes were steady and trading workflows improved.
When AiEX was first launched 11 years ago, trades were all executed using a request-for-quote (RFQ) trading protocol, whereby traders would set a predetermined number of dealers who would see the trade and provide a quote, and once all of the relevant parameters were achieved, the trade would be executed. The corresponding audit trail would come along for the ride, giving traders evidence of best execution and all of the relevant post-trade information they needed for recordkeeping compliance. The end-result was that the tool performed as advertised. Trades were executed seamlessly, compliance checks and balances were met and the so-called easy trades were able to be done without much fuss.
Trading Efficiency To Trading Edge
It did not take long, however, for some of our clients to start seeing a potential higher calling for AiEX. As Tradeweb continued to evolve the technology, adding asset classes and new trading protocols, such as click-to-trade and Request-for-Market (RFM) to the mix, its utility continued to grow. Meanwhile, as our hedge fund clients continued to refine their own workflows and learn from their experiences using AiEX, they started to dramatically expand the universe of applicable use cases where AiEX could unlock new value, specifically across global rates products.
As these clients began to refine their use of AiEX during different market conditions, they quickly found that they could deploy different execution protocols in an automated fashion. For example, during periods of market stress they quickly found that by sending out automated trades via RFM, versus RFQ, they were able to limit their footprint in the market and execute trades far more discreetly than ever before possible. RFM allows clients to ask dealers for a two-way market, rather than a price based on direction. Unlike RFQ, whereby clients seek price quotes from dealers, RFM does not disclose the client’s trading intentions, preventing potentially sensitive or strategically valuable information from being revealed.
Similarly, clients using AiEX with our click-to-trade protocol began streaming dealer liquidity directly into their internal trading systems and automating their trading strategies to execute on streams at certain price thresholds, revealing the trade only to a single dealer and reducing market footprint.
Building A Positive Feedback Loop
In order to continually evaluate their own process and find areas for improvement, some of our most advanced clients soon started using their AiEX post-trade data as a performance improvement tool. Over thousands of trades in different market conditions, using different trading protocols and different parameters, they were able to analyze results and start to optimize the entire process for various asset classes and trading environments. Suddenly, the tool that was originally conceived and perhaps undersold as an “integrated audit trail” became a data-driven guide to an optimal trading strategy.
Continuous Innovation
Ultimately, what’s happening with AiEX should not come as a huge surprise. While it was never really our initial intent to leverage the technology as a precision-tuned strategic execution engine, we did put the pieces in place for that to happen. As we’ve seen in other parts of our business, the combination of a reliable product that delivers proven performance improvement, the flexibility to continually tweak and refine that product and the close collaboration with clients to address real-world use cases creates a recipe for perpetual innovation.
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Tradeweb’s philosophy is to work closely with clients to build new and enhance existing trading technologies that deliver better price discovery and more efficient execution. We are unique among our peers in that we offer electronic marketplaces in rates, credit, equities and money markets. This means we have to cater to a variety of client requirements, and continue to develop innovative and flexible functionality that can be deployed across asset classes. The expansion of AiEX to enhance execution in the hedge fund community has opened the door to different ways of generating alpha when implementing trading strategies.
About Tradeweb Markets
Tradeweb Markets Inc. (Nasdaq: TW) is a leading, global operator of electronic marketplaces for rates, credit, equities and money markets. Founded in 1996, Tradeweb provides access to markets, data and analytics, electronic trading, straight-through-processing and reporting for more than 40 products to clients in the institutional, wholesale and retail markets. Advanced technologies developed by Tradeweb enhance price discovery, order execution and trade workflows while allowing for greater scale and helping to reduce risks in client trading operations. Tradeweb serves approximately 2,500 clients in more than 65 countries. On average, Tradeweb facilitated more than $1.2 trillion in notional value traded per day over the past four quarters. For more information, please go to www.tradeweb.com.
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Tradeweb
Daniel Noonan
+1 646-767-4677
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