(Corrects to remove algorithms from reference to U.S. equity commissions in paragraph after ‘Credit Suisse’ subhed.)
UBS AG (UBSN) will let clients design trading algorithms on Apple Inc. (AAPL:US)’s iPad, putting tailor-made tools in their hands more quickly in an effort to improve performance and capture equities market share, according to executives at the Zurich-based bank.
The move extends a trend toward customization that began about five years ago. Algorithms, used by U.S. asset managers to trade 19 percent of their volume, according to Greenwich Associates, are automated tactics that break larger buy or sell orders into hundreds or thousands of smaller pieces over a specified period to mute price impact and mask activity. Customization allows traders to fine-tune automated strategies.
“We can now build an algorithm in days and we won’t have the lost-in-translation problem about what will ultimately be built -- what’s lost in phone calls and e-mails,” Owain Self, global head of algorithmic trading at UBS, said in an interview. “We’re eliminating the slippage and improving execution.” The electronic strategies will be “more client-centric, more scientific and ultimately more scalable,” Self said.
UBS’s Direct Execution trading group, the 100-person unit in the bank’s global equities division, will extend technology- driven tools to customers as part of a new service called Quant on Demand, said Self, who co-runs the electronic group with Charles Susi. The first product is the QUOD Studio offering of individual algorithms in equities and futures, available today to clients in the U.S., Canada and Europe. It will be accessible to customers in the Asia-Pacific region later this year.
‘Way Less Scary’
The bank has offered individualized algorithms to clients for several years. The iPad system is more visual and intuitive, Susi said. “It is super-powerful and way less scary,” he added.
“It allows clients to have the perfect algorithm for them,” Susi, managing director in equities, said in an interview in UBS’s New York office. “They get the benefit of our research lab. We make clients happy and the ultimate goal for us is to get more clients and market share.”
The bank’s electronic trading group has built 25 to 30 algorithms using the QUOD Studio tools for at least 20 clients in the U.S., excluding UBS’s own trading desks, since late 2011, Self said. Until now customers haven’t been able to use the iPad application to help devise their own algorithms and the bank has done it for them to make sure the process worked, he said. Managers and quantitative analysts will begin visiting clients in the U.S. and Europe today to show them the product, he said.
Traders use different algorithms to achieve varying performance targets, denoted by the average price per share, based on factors such as the stock’s daily volume, market capitalization, volatility and moves during the day. They often adapt the strategies based on how aggressively they want to buy or sell, broader market conditions that affect individual stock behavior, and activity in the shares.
Goldman Sachs Group Inc. (GS:US), Credit Suisse Group AG (CSGN), Bank of America Corp. (BAC:US), Barclays Plc and others offer algorithms that can be customized or built to clients’ specifications. Others such as Orc Group AB and Tbricks AB, both in Stockholm, and Actant AG in Zug, Switzerland, are specialist firms that allow asset managers and professional traders to develop their own tactics.
Asset managers traded 19 percent of the dollar value of their U.S. equity orders through algorithms in the year ending mid-February 2011, according to data from Greenwich Associates. Institutions paid their brokers an average commission of 2.69 cents per share across all types of orders, the Stamford, Connecticut-based research firm said in a June report. The average commission rate for algorithms was 1.3 cents.
Credit Suisse (CS:US) won the most U.S. equities trading among institutional investors surveyed based on total commissions spent, followed by Morgan Stanley (MS:US), according to Greenwich Associates. UBS, which wasn’t among the top five U.S. brokers, was second in European equities, an August report from the research company showed.
The iPad algorithm-development application allows UBS clients to see simulations of how fast and at what prices standardized or custom algorithms will process an order, such as the purchase of 500,000 shares of Cisco Systems Inc. (CSCO:US), based on the automated behavior and parameters chosen and limits on acceptable prices or the volume-based rate of trading. The system uses data from quiet or volatile days, based on what the trader wants to test.
Mutual fund traders and others can use building blocks from UBS’s current list of algorithms to construct the strategy they want. They can tailor standardized algorithms and cobble together multiple tactics, switching between them when a condition such as the stock falling below a certain level is met, and reverting to a strategy used earlier in the day once the number of shares left to purchase declines to a specified number. Any tweak can be inserted into the instructions to replicate decisions a trader would make.
Customers can create algorithms they’ll use for a few weeks during the corporate earnings season or in the run-up to the rebalance of Russell indexes, an event in June when the constituents of the benchmark gauges and their weightings are revamped, Susi said. The day of the rebalance is among the busiest of the year because of the volume that funds must trade.
When a customer finishes constructing an algorithm with a UBS employee, he presses a button and sends it to the bank’s development team so it can be vetted and tested. Risk filters are applied before the user can employ it a day or two later, Susi said. Clients pay the same amount they do for other UBS algorithms, although rates differ among customers, Self said.
The top algorithm providers based on the frequency with which they were cited by asset managers in a Tabb Group LLC study on U.S. institutional equities in November were Credit Suisse, Goldman Sachs, Investment Technology Group Inc. (ITG:US), Bank of America and UBS, the company said in a report. UBS had been fourth in 2010, the New York-based firm said.
“Coupled with a strong broker relationship, longstanding algorithms act as strong magnets for order flow and make it harder for traders to dislodge the broker,” the Tabb report said. Still, the firm said novel products could gain traction. “It is possible for a firm -- through a powerful idea and well- thought go-to-market strategy -- to obtain market share even in a crowded and commoditized sector,” according to the report.
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