The evolution of algo execution through the pandemic and beyond
A few years ago, Societe Generale made a series of strategic investments in its Agency Execution Services business in the U.S. The bank further enhanced its algorithmic trading platform – called Nova - in ways that proved prophetic while serving clients through the pandemic. In the following Q&A, we asked Kevin Sweeney, Head of Cross-Asset Trading and Electronic Product Development, and Morgan Downey, Head of Exchange Traded Derivatives for the Americas, to discuss how the pandemic changed client needs and what the future holds for algo trading.
Societe Generale amped up its electronic trading services two years ago; what has the evolution of the business been in the intervening years?
The focus over the last two years has been to take all the lessons we’ve learned from what we’ve done in the derivatives space and pass it on to the cash equities side. We have spent the better part of two years looking at ways to improve cash equities market execution. We did that by layering in new technology, more proximity located service, and more dynamic indicators.
There have been significant structural changes in the U.S. markets with the expansion of retail flow and the number of smaller sized orders, so it was very, very well timed that we invested in more dynamic and flexible algo solutions.
As an evolving platform, ours is unique in that it was launched in the derivatives markets first and was tailored specifically to derivatives markets. That is a bit different from what you hear from much of the industry, which tends to start upgrades and technology revisions on the cash equities side first.
And clients are responding. We've added more than 100 different clients onto Nova since we’ve upgraded the platform and the trades on the platform now can account for about 10% of our Direct Market Access flow globally.
We offer more than 200 different derivatives products on the Nova platform today and a highly customizable algo suite. We do offer some out of the box solutions, but, for the majority of our client base, it's tailored or customized to fit their needs for what they're trying to target as a benchmark or improve their workflow.
How has algo development changed in the wake of the market volatility that came with the COVID sell-off?
The biggest change we saw was how the industry had to adapt to the work-from-home environment. The checks and balances in the governance were really in play. We had to ask ourselves, can we operate at the same high-level when we aren’t physically next to one another? And thankfully, in turns out we can. So, the volatility itself is not the issue. It was just more of the COVID impact from a geographic standpoint that was the issue. Can you operate the algos remotely? What happens if there's a problem overnight? All those things, where ordinarily you’d just be able to deal with it by just walking down the aisle, you now had to factor in remote interaction. That change incorporated quite a lot of technology. We had some of our largest trading days over that February - April (2020) timeframe, and it definitely validated that the Nova performance was excellent and that the scale that we have, and capacity that we have, work quite well. It was amazing talking to clients during that period. They needed us more than ever and we delivered.
And how have client needs evolved over the past two years?
On the client side, there has definitely been a double-down in electronification and automation over the last two years. We’ve seen buy-side and sell-side desks get smaller as commissions and fees continue to get smaller as well. With those reductions, manual processes need to be removed and streamlined into automated processes. Electronification for the last 10+ years, let alone two, has been at the forefront of that.
But last year escalated this further, as everyone in the industry was adapting to the same situation: getting remote setups at home, replicating (as best possible) their office setups, some moving to different states, some leaving the country, etc. Dealing with remote issues or not being able to have the synergies of being in the office, for everyone automating workflows as much as possible was needed to help their lives out.
Being proactive and responsive to clients was extremely important. These remote working trends have been happening for a number of years – just not necessarily on the trading side. Pandemic adaptability put technologies and teams to the test like never before, and we can see that tech and network stability have really advanced in the last few years.
There was also the trust factor there. Clients really needed us, they relied on our team and their relationships to face unprecedented trading needs. They relied on the people they knew would deliver. And you saw that more and more, in addition to the electronic advances, they needed a steady platform to really help them. Because again, everyone was working uniquely. You had clients that would call us, and they were working on card tables or folding tables and all the various other setups. And we were there every step of the process, and it took a lot of logistics.
So, more and more, that electronic evolution, it paid dividends. But that feeling of trusted allies to do was also needed. It was extremely complicated, and those last few weeks of the first quarter, and really when COVID hit its spike, from when we were moving out, I don't think the street worked any harder. It was almost like another situation that I was familiar with, which was 9/11, where you had to respond to unique situations. But I think overall that evolution of technology and electronic trading really paved the way for success.
Can you walk us through how the algo platform was updated and what market evolutions guided the changes?
Not related to COVID, one of the bigger upgrades that we did to our Nova product on the derivatives side was adding support for more exchange-supported calendar spreads. While we’ve seen steady use for these algos on US markets the past few years, requests for more products to be added really started taking off as we saw Eurex offer reduced tick spreads. There, we’ve seen the majority of liquidity go on screen, where volume was only ~25-30% electronic vs block trading a few years ago. Now they're reaching 60% -80% of the traded volume. As more clients expressed interest in spread algos on Eurex, that naturally expanded to other European exchanges, and then for more APAC products as well.
And on the cash side, before COVID, but amplified by COVID, you saw the opposite of derivatives where more and more liquidity was being executed off-exchange. There was a continuous rise for both ATSs, dark pools, and what we call single-broker platforms, where quite honestly, clients just needed liquidity. And we've had a big focus on building that kind of apparatus. We call it Smart Liquidity, which is taking Societe Generale liquidity and placing it directly with clients. That has seen considerable price improvement, which is one of the biggest changes from two years ago.
Finally, how do you view the state of electronic trading today, and has that changed in the wake of COVID volatility and the most recent surge in retail trading?
Electronic markets have never been stronger. And the expansion of algos has never been more needed. From an execution standpoint on the equity side you have fragmentation across the U.S. markets, and you have fragmentation across Europe. There's a need to have smarter routing and electronic algos to help provide liquidity for traders that need it. From a COVID standpoint, there was no way possible with a geographically diverse trading base that you could operate successfully. Most of our clients did because of electronic solutions and the ability to manage algos and manage a tremendous number of orders using tools rather than just old-fashioned pen and paper.
Clients are looking for electronic solutions and how to trade more complex products that were once trading on floors or pits. We’ve seen vendor systems that we’ve partnered with help step in, and we’ve been developing some of our own custom solutions to help with this evolving market change as well. COVID was the final nail in the coffin for a number of trading pits that were left in the derivatives market here in the U.S., and, so once again, you’re seeing electronic trading and STP functionality come into play for those products.