While much of a fund manager or CTA’s job is creating alpha generating trading signals (you know – the things that tell them when and where to get into the markets), the execution of those signals is becoming more and more important as the professional trading space becomes more and more automated and computerized during what we’ve dubbed the Quant Revolution.
In a new whitepaper detailing Best Practices in Algorithmic Execution by RCM’s newest business unit, RCM-X, we find just how automated things have become. Between 2015 and 2017, the CFTC found that up to 80% of all trades in the futures markets are done by automated trading. To be clear, we’re talking here about the actual placing of the buy/sell/stop/limit/etc. signal with the exchange via an API connection between the professional trader’s servers and the exchange. They highlight a simple example of crossing the spread (buying at the offer and selling at the bid) every time you enter and exit the market. Add up these trades throughout a year and it could mean the difference between a good year and a great year.
RCM-X was launched in 2017 to provide trading technology and risk management services to the professional trading and investment management space (that’s you CTAs, CPOs, hedge funds, and prop firms). In effect, it was our answer to the question put to CTAs we work with – asking whether they believe their execution is a strength or a weakness. It was the answer to the ever more frequent question in this automated world: What’s a CTA to do? The answer, it turns out, is a CTA should be using customizable execution algorithms and sophisticated transaction cost analysis (TCA) tools as a best practice to minimize slippage by quantifying these dynamic costs created by an ever-changing market.
The RCM-X team has settled in nicely at RCM so far, building out a full suite of both stock and futures market execution algorithms as they add contract specific parameters to each algo; and we finally broke them away from coding long enough to get them to write up this whitepaper giving an overview of why algorithmic execution is important, and who (not just the managers, investors in the products need to take heed too) should be asking for it.