ARE VWAP ALGORITHMS OBSOLETE? - WHITE PAPER BY QUOD FINANCIAL

London - 25 September 2007

Quod Financial, the leading 3rd generation order management system for buy- and sell-side institutions, today announced the release of its latest white paper, 'The next generation in algorithmic trading: liquidity-seeking adaptive execution algorithms.'
Investigating the impact of the changing trading environment, in particular the phenomena of liquidity fragmentation and multi-asset trading, Quod Financial highlights the necessity for a fresh approach to execution algorithms.

With liquidity fragmentation, new regulatory requirements for best execution, and the rise of dark pools, the current generation of execution algorithms, in particular those driven by the scheduling and slicing approach (such as Volume Weighted Average Price or VWAP), are becoming obsolete.

"There are a number of converging market forces contributing to the necessity for a new generation of execution algorithms," stated Mickael Rouillere, CTO of Quod Financial. "Firstly, the rapid increase of dark pools, internalisation, and liquidity fragmentation undermine the effectiveness of the current statistical-based algorithms. Next we have the need to combine trade execution with slicing, scheduling or other algorithms without increasing the overall latency. Lastly, we have new regulatory requirements to achieve and prove best execution. This has created an urgent need to move to a new generation of execution algorithms that are liquidity-seeking, and adaptive to changing market conditions as well as taking into account complex best execution policies."

"Liquidity is one of the fundamentals of electronic trading, and there is far more liquidity available than that seen on the exchanges and crossing networks. Predicting this liquidity is the next big step in execution algorithms. These new-generation algorithms will incorporate some of the features of their current-generation counterparts, such as limiting market impact, but with larger and far more complex execution objectives. We have succeeded in building such liquidity-seeking algorithms and are currently delivering these for our clients,"
concludes Ali Pichvai, MD of Quod Financial.

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