European Algorithms: The Evolution Executive Summary The development of European algorithms is taking a critical step forward and a new generation of algorithmic trading is evolving.  The leading edge in Europe will now be provided by high-definition venue analysis, transparency into electronic decision making, common standards of performance methodology and independent verification of results.  It will soon become clear which brokers are able to offer value-added services and those

While the demand for differentiation is global, the greatest challenge currently lies in Europe.  With its subjective ‘best-execution’ policy and lack of requirement to interconnect the markets, European brokers have both flexibility and responsibility.  Combined with the expected changes in regulation from MiFID II, higher transaction costs and fierce competition, the potential push of scarce remaining volume towards the lit markets means only new developments in data and venue analysis can help European buy-side traders navigate environments where information leakage is high and market impact unavoidable.

The European market will remain fragmented for the foreseeable future.  Low volumes are likely to persist and there is a risk that volumes will decrease even further given the overall higher execution and clearing costs found in Europe.  In this environment, the ability to correctly predict when and where to trade is becoming crucial to broker differentiation, and the focus has switched to a new combination of intuitive algorithms, far-superior smart order routers (SORs) and highly intricate data analysis.  SORs in the US have been fairly utilitarian to date, but in Europe they are becoming a key differentiator in venue analysis and execution performance.  Instead of the arguments over latency and the merits of high-frequency trading, European electronic trading is more focused on analysing data analytics and venue performance to such an extent that even latency to some exchanges is being controlled in order to optimise order execution.

Intelligent algorithms are not new, but the differentiation comes with the granular level to which the customisation and analysis can supposedly now reach.  Consistency across how data is recorded and how performance is analysed will go a long way in providing the answers to those buy-side traders who remain sceptical of these new capabilities, and may offer a glimmer of hope to those dulled into apathy by the algorithmic cross-pollination that currently exists. 

Some buy-side firms remain convinced that their only option to stay one step ahead of the curve is to invest in their own proprietary technology and infrastructure.  However, few have the resources or appetite to invest in proprietary tools in the current climate, but those that do will steal a march in the search for alpha. 

The growing myriad of trading venues means the difference between the winners and losers will be those who have made significant investment in SORs and their ability to analyse venue performance.  Once accused of dumbing down trading, electronic order execution is now changing the nature of trading in Europe by demanding space-age capabilities in order to hide trading intentions and hunt out executable liquidity at the best available price.

The TABB Group Vision Note, European Algorithms: The Evolution, examines the development of next-generation algorithms and the implications for markets both within Europe and beyond.