Hong Kong based, Brook Teeter, director, head of advanced execution services (AES) sales, Asia Pacific, at Credit Suisse, talks about the current trading conditions and how algorithmic trading tactics are helping more and more investors to outperform the market.

How have you found trading conditions in the last six months?

What we have been seeing over the last six to nine months has been an increase in volatility in Asia. It has spiked considerably, with volatility up 400% between September and November. And bid-ask spreads have increased by over 70% over that time frame.

With deteriorating trading conditions leading to greater volatility in the markets, as investors fall to buying and selling frenzies, speed of thought and speed of transaction is now imperative. But because of the unpredictable nature of the markets, how have basic algorithmic trading techniques such Volume-Weighted Average Price (VWAP) and Time Weighted Average Price (TWAP) been holding up? Has the unpredictability of volume curves negated the effectiveness of VWAP executions?

From a client point of view, it has been a very difficult market to trade. For example, before we entered the current period of high volatility, the volume distribution curve that was used to trade VWAP was very good and highly accurate at predicting volume in the market.

However, now the volatility of the volume has become much more exaggerated and very hard to predict. Stocks no longer follow a typical VWAP pattern. Couple that with the fact that spreads in Asia have widened considerably and in some cases have increased by more than 70% - this is even more pronounced in less liquid markets like Malaysia - and it becomes extremely difficult to hit benchmarks and trade effectively.

Algorithmic trading has become much more sophisticated in recent years, with firms like Credit Suisse developing systems to utilise ever larger amounts of intraday data to optimise things like slicing frequencies, spread crossing and order amendment frequencies. But what is the best tactic to utilise in current conditions, is it stealthy orders?

The performance of our more traditional strategies has suffered because of the current market structure. The large spreads, price volatility and reduction in traded volume all make it very hard for the strategy to achieve its trading goal. In contrast, some of our more sophisticated strategies like Sniper and Guerrilla take advantage of the current market conditions to trade on short-lived opportunities, and have actually increased their performance versus benchmarks. In addition, with the introduction of Dark Sniper and Dark Guerrilla which focus on stealth, we have seen our smarter strategies consistently outperform the VWAP benchmark, and in these times of hyper-volatility they have become more effective, and hence the increase in performance.