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