TW - How Hedge Fund Clients Are Pioneering Sophisticated New Strategies with Automated Trading
(NewsDirect)
Automated trading hasemerged as a strategic edge for a specific segment of theinstitutional marketplace, employing it effectively in theirsystematic trading approaches. While this may not be the use case weenvisioned back in 2012 when we launched AutomatedIntelligent Execution (AiEX) , we’re certainly energized as ourhedge fund clients embrace the tool to innovate, potentially steeringit in new directions.
This particular story involving AiEX evolution follows asimilar trajectory to what we’ve seen with tech developments inother industries. Whether it’s the explosion of AI and algorithmicmodels made possible by the widespread availability of cloud-basedcomputing, or the proliferation of offshoot businesses and marketingstrategies that have grown up around social media, the full power of atechnology isn’t always clear until end-users start experimentingwith it. It’s also a classic example of what can happen when you puta reliable, flexible tool in the hands of some of the world’s mostsophisticated traders.
Traditionally, systematic execution strategies were primarilyassociated with equities, where high-frequency trading and algorithmicstrategies gained prominence. However, with the advancement oftechnology and sophisticated algorithms, automation has extended itsreach into asset classes that were historically challenging tonavigate with automated strategies. This technological leap has pavedthe way for systematic equity-focused firms to diversify theirstrategies and venture into fixed income asset classes.
The surge in automationadoption in interest rate swaps is a great example of thetransformative impact technology has had on financial markets,allowing for faster and adaptive trade executions. Additionally,automated systems can continuously monitor and adjust tradingparameters based on changing market conditions. As more systematicfunds expand their reach into fixed income, leveraging automationallows them to deploy proven strategies, optimize trading processesand capitalize on new opportunities across diverse assetclasses.
Sincelaunching AiEX we’ve expanded our solution to 26 of our products tohelp our customers capitalize on strategic trading opportunities,increase their reactivity to market conditions and streamline andexpedite their workflow.
Roots InEfficiency
By wayof background, AiEX works by linking a client’s order managementsystem (OMS) directly to the Tradeweb platform and fully automatingthe execution of a trade. At the basic level, the technologyautomatically applies pre-configured conditions, such as pricetolerance thresholds, minimum number of quotes required to trade andclient-specific compliance thresholds. The trade is then executed atthe best price and sent back to the client’s system.
In its earliestincarnations, AiEX was specifically marketed as a tool to free uptraders’ time by automating low-touch trades of U.S. Treasuries.Trade sizes were relatively small, volumes were steady and tradingworkflows improved.
When AiEX was first launched 11 years ago, trades were allexecuted using a request-for-quote (RFQ) trading protocol, wherebytraders would set a predetermined number of dealers who would see thetrade and provide a quote, and once all of the relevant parameterswere achieved, the trade would be executed. The corresponding audittrail would come along for the ride, giving traders evidence of bestexecution and all of the relevant post-trade information they neededfor recordkeeping compliance. The end-result was that the toolperformed as advertised. Trades were executed seamlessly, compliancechecks and balances were met and the so-called easy trades were ableto 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 highercalling for AiEX. As Tradeweb continued to evolve the technology,adding asset classes and new trading protocols, such as click-to-tradeand Request-for-Market (RFM) to the mix, its utility continued togrow. Meanwhile, as our hedge fund clients continued to refine theirown workflows and learn from their experiences using AiEX, theystarted to dramatically expand the universe of applicable use caseswhere AiEX could unlock new value, specifically across global ratesproducts.
As theseclients began to refine their use of AiEX during different marketconditions, they quickly found that they could deploy differentexecution protocols in an automated fashion. For example, duringperiods of market stress they quickly found that by sending outautomated trades via RFM, versus RFQ, they were able to limit theirfootprint in the market and execute trades far more discreetly thanever before possible. RFM allows clients to ask dealers for a two-waymarket, rather than a price based on direction. Unlike RFQ, wherebyclients seek price quotes from dealers, RFM does not disclose theclient’s trading intentions, preventing potentially sensitive orstrategically valuable information from being revealed.
Similarly, clients usingAiEX with our click-to-trade protocol began streaming dealer liquiditydirectly into their internal trading systems and automating theirtrading strategies to execute on streams at certain price thresholds,revealing the trade only to a single dealer and reducing marketfootprint.
Building A PositiveFeedback Loop
Inorder to continually evaluate their own process and find areas forimprovement, some of our most advanced clients soon started usingtheir AiEX post-trade data as a performance improvement tool. Overthousands of trades in different market conditions, using differenttrading protocols and different parameters, they were able to analyzeresults and start to optimize the entire process for various assetclasses and trading environments. Suddenly, the tool that wasoriginally conceived and perhaps undersold as an “integrated audittrail” became a data-driven guide to an optimal tradingstrategy.
ContinuousInnovation
Ultimately, what’s happening with AiEX should not come as ahuge surprise. While it was never really our initial intent toleverage the technology as a precision-tuned strategic executionengine, we did put the pieces in place for that to happen. As we’veseen in other parts of our business, the combination of a reliableproduct that delivers proven performance improvement, the flexibilityto continually tweak and refine that product and the closecollaboration with clients to address real-world use cases creates arecipe for perpetual innovation.
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Tradeweb’s philosophy is to work closelywith clients to build new and enhance existing trading technologiesthat deliver better price discovery and more efficient execution. Weare unique among our peers in that we offer electronic marketplaces inrates, credit, equities and money markets. This means we have to caterto a variety of client requirements, and continue to developinnovative and flexible functionality that can be deployed acrossasset classes. The expansion of AiEX to enhance execution in the hedgefund community has opened the door to different ways of generatingalpha when implementing trading strategies.
About TradewebMarkets
Tradeweb Markets Inc.(Nasdaq: TW) is a leading, global operator of electronic marketplacesfor rates, credit, equities and money markets. Founded in 1996,Tradeweb provides access to markets, data and analytics, electronictrading, straight-through-processing and reporting for more than 40products to clients in the institutional, wholesale and retailmarkets. Advanced technologies developed by Tradeweb enhance pricediscovery, order execution and trade workflows while allowing forgreater scale and helping to reduce risks in client tradingoperations. Tradeweb serves approximately 2,500 clients in more than65 countries. On average, Tradeweb facilitated more than $1.2 trillionin notional value traded per day over the past four quarters. For moreinformation, please go to www.tradeweb.com.
Forward-Looking Statements
This release contains forward-looking statements within themeaning of the federal securities laws. Statements related to, amongother things, our outlook and future performance, the industry andmarkets in which we operate, our expectations, beliefs, plans,strategies, objectives, prospects and assumptions and future eventsare forward-looking statements. We have based these forward-lookingstatements on our current expectations, assumptions, estimates andprojections. While we believe these expectations, assumptions,estimates and projections are reasonable, such forward-lookingstatements are only predictions and involve known and unknown risksand uncertainties, many of which are beyond our control. These andother important factors, including those discussed under the heading“Risk Factors” in documents of Tradeweb Markets Inc. on file withor furnished to the SEC, may cause our actual results, performance orachievements to differ materially from those expressed or implied bythese forward-looking statements. Given these risks and uncertainties,you are cautioned not to place undue reliance on such forward-lookingstatements. The forward-looking statements contained in this releaseare not guarantees of future performance and our actual results ofoperations, financial condition or liquidity, and the development ofthe industry and markets in which we operate, may differ materiallyfrom the forward-looking statements contained in this release. Inaddition, even if our results of operations, financial condition orliquidity, and events in the industry and markets in which we operate,are consistent with the forward-looking statements contained in thisrelease, they may not be predictive of results or developments infuture periods. Any forward-looking statement that we make in thisrelease speaks only as of the date of such statement. Except asrequired by law, we do not undertake any obligation to update orrevise, or to publicly announce any update or revision to, any of theforward-looking statements, whether as a result of new information,future events or otherwise, after the date of this release.
Contact Details
Tradeweb
DanielNoonan
+1 646-767-4677
CompanyWebsite
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