is 356 it for financial services algorithmic trading pptallon/is356.htm portions of this...
TRANSCRIPT
IS 356IT for Financial Services
Algorithmic Trading
http://www.evergreen.loyola.edu/~pptallon/is356.htm
Portions of this presentation are compiled from presentations given by Morgan Stanley entitled “Algorithmic Trading: Equity Trading vs. Futures Trading” and others by the Tabb Group.
April 21, 2023
Why should you care? Algorithms are dominating the market
– They are the future of securities trading If you want to work for a buy-side firm…
– Expect to find algorithms in your toolbox– Have you heard about quant funds?
Not all algorithms are the same– Some are little better than a coin-toss– Others will rock your socks off
Got math and statistics?
© Paul Tallon 2/21
April 21, 2023
TED – Ideas Worth Spreading
© Paul Tallon 3/21
April 21, 2023
Information Processing Time Falls
© Paul Tallon 4/21
April 21, 2023
Job Postings
© Paul Tallon 5/21
April 21, 2023
What is an algorithm? A pre-defined step-by-step method to accomplish a task A computer model that takes an order and structures a
sequence of trades that aim to achieve the stated objectives…
– Minimize cost compared to a defined benchmark– Maximizing fill rate– Minimizing execution risk
6/21
Source: Morgan Stanley
April 21, 2023
Is the current trading model broken?
© Paul Tallon 7/21
April 21, 2023
Why use algorithms?
© Paul Tallon 8/21
April 21, 2023
Types of algorithms…
© Paul Tallon 9/21
Source: Tabb Group
April 21, 2023
Algorithm selection criteria
© Paul Tallon 10/21
cost
April 21, 2023
Algorithm Challenges
Not great with illiquid stocks– If volume is low on a typical day, there’s not much
point in adopting an algorithm Algorithms do not react well to news releases
– Humans are still needed to interpret releases Commoditization is a reality
– Seen one, seen ‘em all (not quite yet) The return of volatility calls for quality algos
© Paul Tallon 11/21
Source: Adam Sussman, Tabb Group
April 21, 202312
Trade lifecycle
Contr
olFeedback Loop
Benchmark Determination
Execution
Sort
Limit Order Prog.
Crossing vs.Liquidity Pool
Trade/Trajectory Planning
Execution Evaluation
TCA
Source: Morgan Stanley
12/21
April 21, 202313
Benchmark Determination
More Structured Less Structured
Order(s) Trade Structure Development
Schedule Based Flexible Dynamic
VWAP
TWAP
Volume Participation Arrival Price
Price React
Source: Morgan Stanley
13/21
April 21, 202314
Trade/Trajectory Planning The VWAP strategy creates a
trade plan that emulates the historic volume distribution (either all day or interval).
Trajectories are static from the beginning of the trade and do not respond to changes in intraday liquidity.
3. Volume % Limits
1. Price Limits
2. Duration Limits
Parameters Available for VWAP are:
Source: Morgan Stanley
Volume Weighted Average Price
14/21
April 21, 202315
Order quantities are determined for individual time sub intervals and scheduled for execution according to continuously updated forecasts of volume
Target Percent of Volume
Trade/Trajectory Planning
Source: Morgan Stanley
15/21
April 21, 202316
The trader decides a level of execution urgency- get done, high, medium, or low.
Trajectory is based on continuously updated forecasts of volatility, liquidity and spread, and changes dynamically during execution with the changing market conditions.
Order quantities are determined for individual time sub intervals and scheduled for execution.
Arrival Price: Low Urgency
Arrival Price: High Urgency
Trade/Trajectory Planning
Source: Morgan Stanley16/21
April 21, 2023
FidelityCross
Stream
LEHLCX
CSCrossFinder GS
SigmaX
UBSPINS
MorganStanleyPOOL
CITIACE
MSTrajectoryCrossing
Liquidnet
NYFIXMillennium
BIDS
ITG Now
ITG BlockAlert
Instinet(CBX,etc.)
NASDAQCrossingNetwork
Matchpoint
ISEMidpoint
Match
LeveL
Pipeline
POSIT
TRAC /DATA
EDGX /EDGA
ONTD
BATS
BTRD
CBOEISE StockExchange
NSX /CINN
BeX
CHX
NYSEArca
NASDAQINET
NYSE
AMEX
PHLX
SMART ORDERROUTING
TECHNOLOGY
SORT
Source: Morgan Stanley17/21
April 21, 202318
Post Trade Analysis
18/21
April 21, 2023© Paul Tallon 19 /21
Insights…http://www.thetrade.ltd.uk/ALGO_PART_1.pdf
April 21, 2023
For more information…
© Paul Tallon 20/21
http://www.pdf-search-engine.com/algorithmic-trading-pdf.html
April 21, 2023© Paul Tallon 21 /20
For Next Class… Read
– The second blog is due on October 9
– First case write-up is due at the start of class on October 2
– Midterm on October 16