DonÆt blame algorithms for hedge fund implosions

CS takes its algorithm suites to Malaysia at the same time as electronic-trading losses move to centre stage.
Events of the last week û not least the losses suffered by Goldman SachsÆ Global Equity Opportunities Fund û have shown how electronic execution matters, especially if there is a quantitative dimension to trading. You can have the best electronic execution methods, but if they follow æorders that must be obeyed at all timesÆ, and this leads to your fund following the herd off the cliff edge, blame your black box and the ratios and formulae that you input, not necessarily your algorithm.

It is often said that algorithms can only be as good as the tradersÆ underlying asset allocation decisions. The electronic execution market is making quick strides throughout Asia, and has become a vital product for many brokers. The algorithm just does its job of doing the spadework as efficiently as it can; the investor must still be the master of his trading strategy.

That is a point now being stressed by Credit Suisse, one of the market leaders in this field. It is now rolling out its algorithmic trading services to a number of countries globally, including, in this region, Malaysia. It will be supported by its advanced execution services department in Hong Kong.

Volumes have increased steadily in Malaysia during 2007 and electronic trading has been a big contributor to that surge. CS says that a large number of its clients have expressed interest in using its algorithm suites in Malaysia.

ôSpreads are still quite large in Malaysia with generally low turnover for many stocks. The median spread size is 60 basis points, but can be as large as 160 basis points,ö says Brook Teeter at CS in Hong Kong. ôSuitable algorithms in Malaysia to start with will certainly be VWAP and Reserve-type strategies. Algorithms such as Volume Inline will also work well.ö

Credit SuisseÆs dark pool, known as æCrossfinderÆ, will not be opened at this point for Malaysian trades. The next stop for that particular service is in Korea. Elsewhere in CSÆ algorithms, it has recently released a pairs trading system via its Trading Screen for the Asian markets. It will also expand DMA access to other parts of Asia and will announce more about that shortly.
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