Tue, Jun 21, 2016 - Page 15 News List

Humans winning against algorithms at block trades

SENTIENT STRATEGY:Trading algorithms attempt to avoid detection, but traders have become adept at sniffing them out — and driving prices the other way


Machines might be taking over the world, but in at least one corner of the markets humans are beating back the robots.

Sales traders such as Citigroup Inc’s Samantha Huggins are in demand because they are proving more adept than computer programs at trading big chunks of stock, dubbed block trades.

While finding a buyer or seller and completing a transaction by telephone is more expensive up front, Huggins said her 18 years spent navigating the markets gives her an edge in avoiding the pitfalls of letting some software slice the trade into tiny tranches over hours or an entire day.

So far, their niche is resurging amid an onslaught of technological evolution.

In the US, sales-trader execution of single stocks rose to about 51 percent — the first increase since 2011, according to Greenwich Associates.

In Europe, the number is 55 percent, and their ranks are swelling.

Banks have been ramping up hiring of “high touch” sales traders in the last six to eight months, recruitment firm Armstrong International said.

That is especially notable when banks in the US and across Europe have slashed tens of thousands of jobs in the past few years alone.

The bespoke service is not for everyone. At banks such as Citigroup, the biggest clients are the ones pining for the human touch. That is because they are only getting bigger and so hold ever larger positions. For example, assets under management at global investment firms have been rising since the depths of the crisis, and gained 8 percent to a record US$74 trillion in 2014, Boston Consulting Group data show.

Handling a mammoth trade presents hazards. Algorithmic trading programs try to avoid detection by drizzling out trades little by little, but traders have become adept at sniffing out those patterns and drive prices the other way.

Another risk is that news could break, whipsawing the value of the stock before the transaction is completed. Those risks are why big investors would prefer to avoid expensive mistakes and are willing to pay higher fees to make a trade in one big swoop.

High touch sales traders such as Huggins specialize in those transactions, and they are expected to know all about their customers, including what is in their portfolios, how they like to transact and what kind of news is important to them.

Top-tier brokers also know where to find counterparties. Portfolio managers are withdrawing from the market at levels not seen in more than 14 years. An algorithm cannot find them, but an astute trader might be able to.

“A sales trader can do some very creative things,” said Rob Boardman, chief executive officer of Europe of Investment Technology Group Inc, an electronic broker and dark-pool operator.

The firm employs sales traders and also develops buying and selling algorithms.

“Small-batch, lightning-fast trading isn’t necessarily attractive to big institutional firms,” said Simon Steward, head of European equity trading for Los Angeles-based Capital Group Cos, which oversees about US$1.4 trillion.

It uses humans for more than two-thirds of its European stock trades.

Another concern is the boom in passive funds, which traders say dry up trade opportunities. Some index funds primarily transact in closing auctions, which can make it more difficult to trade during the rest of the day. About 20 percent of the day’s volume happens at the close in Europe, compared with 14 percent in 2009, Citigroup data show.

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