Algorithmic trading in futures and commodities markets presents unique challenges in comparison to the relatively simple algorithms used in equities.

“The matching engines are different,” Christian Hauff, CEO of Quantitative Brokers, told Markets Media. “In futures, particularly interest rate futures, you have matching engines that are pro rata, which is a lot different from what equities ubiquitously utilize, which is a price-time matching engine.”

Futures Commission Merchants and their buy-side clients are deploying a wide variety of algorithms beyond the basic Volume-Weighted Average Price (VWAP) and Time-Weighted Average Price (TWAP) that were imported from other asset classes.

With pro rata matching, an incoming order’s quantity is multiplied by each resting order’s pro-rated percentage to calculate allocated trade quantity. The resting order’s pro rata percentage is calculated by taking order quantity divided by total quantity at a certain price.

“Pro rata obviously benefits those that allocate or post a significant portion of the best bid or offer, and receive proportionately larger fills,” said Hauff. “There is also FIFO [first in, first out] pro rata matching, which is a hybrid combination where there is some time priority, but there’s also size preference allocations.”

Another inherent difference between futures and equities is the interrelationships between instruments. “If you are executing one tranche on the yield curve you need to be conscious of the dynamic relationship with the neighboring point,” Hauff said. “We’re able to generate our integration models and relationships on the term structures that allow us to be a lot smarter and intelligent.”

While most futures trading is now electronic, a portion of the more complex trades continues to be processed manually, which Hauff says may result in slippage, or trading inefficiency. “Obviously with the CME floor being closed permanently from the 3rd of July, you’d be surprised that there still is a lot of futures rolls down on the floor,” he said. “People are now starting to realize that handing that roll order over to their broker isn’t the most transparent process, and there may be smarter ways they could manage execution for that.”

Options on treasury futures is another sector that’s ripe for algorithmic trading. “That’s an area that’s been increasingly shifting to electronic,” said Hauff. “There is an incredible need for smarter electronic execution on those electronic order books.”

QB is also “significantly investing” in its multi-base algorithm called Legger, “which allows a fixed-income or commodity trader to pair multiple instruments simultaneously and execute any number of legs and size ratios across exchanges and trade that relative to a synthetic market price, which is really a fascinating space, and one we think is going to grow as volatility changes,” Hauff said.

REDI Global Technologies has integrated a suite of futures algorithms and DMA tools from Quantitative Brokers into its trade management platform, REDIPlus, providing its users direct access to the algorithmic broker. Under the arrangement, REDI users can access QB’s Bolt and Strobe algorithms.

“Opening up to futures traders on REDI is a significant opportunity for us as an organization, and also creates a unique addition to the already distinct multi-broker offering of REDI,” said Hauff. “So we continue to pursue relationships like that, and we hope to increase that group of partners as we continue to evolve as a company.”

He added, “We’re not a front end provider. QB relies on such broker neutral vendors to provide access to our offering via their interfaces.”

“Quantitative Brokers has quickly become one of the leading providers of best execution algorithms for the fixed income and futures markets,” said Sean Sullivan, chief revenue officer at REDI, in a statement. “This arrangement provides our users with access to best-in-class agency algos through the addition of an extremely well-regarded broker to the REDI network.”

Featured image by bluebay2014/Dollar Photo Club