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Algorithmic Trading
EXECUTION SERVICES
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Algorithmic TradingPart of the Crdit Agricole Group, CA Cheuvreux is the leading pure-agency European equity broker.
Its historical multi-local model positions CA Cheuvreux as a cutting-edge outperformance provider for
its 1,200 institutional investor clients. CA Cheuvreux offers extensive, high value-added services in
Research, Sales and Execution. With 90 analysts and economists, and unparalleled coverage of 700
stocks, CA Cheuvreux is continuously ranked in the Top 5 or European Country research and a Top 3
European Corporate Access provider.
CA Cheuvreux provides extensive market access to 100 execution platorms worldwide including all
major MTFs and dark pools. Ranked No. 3 in Sales Trading Client Service & Trading Ideas/Updates,
CA Cheuvreuxs execution specialists offer a wide spectrum of frst-class products: DMA, Algorithmic
Trading, Global Portfolio Trading, Equity Swaps and its own internal crossing engine Blink.
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YOUR ALGO CONTACTS
Europe: US & Canada:
+ 44 207 621 66 [email protected]
+1 212 492 [email protected]
* Through our sister company CLSA
TRUE AGENCY BROKERAGE
CA Cheuvreux is a member o the AA-rated
Crdit Agricole Group, one o the worlds
leading banking institutions. With 120
execution specialists on 100 execution
venues, CA Cheuvreux oers an access to
global markets - Europe, the Americas, the
Middle East, Asia Paciic* and Arica.Fast, secure execution with zero inormation leakage
STRIVING FOR EXCELLENCE
Giving you an edge through continuous
improvement o our algorithmic tools and the
development o new models.CA Cheuvreuxs advanced research platorm ensures a
quality algorithmic model perormance. Our edge comes
rom our advantageous market position and subsequentcommitment to cutting edge technology.EXTENSIVE
EXTENSIVE MARKET KNOWLEDGE
In-depth understanding o local markets com-
bined to a broad range o sophisticated trading
strategies.CA Cheuvreux is a member o all the major stock
exchanges and oers a reliable point o entry to global
markets via partnerships with others entities o the Crdit
Agricole Group.
LEADING EXECUTION TOOLS
Our state-o-the art selection o execution
tools is available to help you trade in line
with the market, capture liquidity or increase
alpha return.CA Cheuvreux oers a range o products that comple-
ment and enhance the service oering or you and can
be used advantageously in conjunction with Algorithmic
tools. This sophisticated range o trading tools isconstantly evolving to meet changing client demands.
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CA Cheuvreuxs algorithms fall into two main categories: benchmark and liquidity seeker.
Benchmark algorithms (VWAP, Implementation Shortfall, % Volume, Target Close, TWAP,
InLine) are better suited for longer duration orders (from 30 minutes to one day, depending on
the liquidity of the traded stock), because they control the execution rate. Conversely, the shorter-
term liquidity seekers (CrossFire, Hunt, Iceberg) can execute 100% of an order very rapidly if
market conditions are compatible with the order parameters.
Optimal execution o portolio transactions, Journal o Risk, Vol. 3, No. 2. (2000), pp. 5-39, by R.F. Almgren, N. Chriss.See Rigorous Strategic Trading: Balanced Portolio and Mean-Reversion, Journal o Trading, Vol. 4, No. 3. (2009), pp. 40-46, by Charles-Albert Lehalle, Head o Quant Research at CA Cheuvreux, or The impact o liquidity ragmentation
n optimal trading, Institutional Investors Liquidity Guide (2009), also by Charles-Albert Lehalle.Optimal split o orders across liquidity pools: a stochastic algo rithm approach, LPMA preprint 2009 by Gilles Pags, Sophie Laruelle, Charles Albert Lehalle; presented during a guest lecture at the quantitative inance seminar o Columbia
University and New York University in December 2009.
8
7
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4
3
2
1
0
09.1509.55
10.3511.15
11.5512.35
13.1513.55
14.3515.15
15.5516.35
17.15
Tradedvolumes(pct
)
10
20
30
40
50
60
70
Intradayvolatility
(bp/10min)
09.1509.55
10.3511.15
11.5512.35
13.1513.55
14.3515.15
15.5516.35
17.15
Figure 2: A typical European volume curve (at left) and volatility curve (at right). Three usual effects can be seen: (1) During the first hour of trading, the impact of the overnight price change
can be seen in the markets: more shares are traded, and prices may move more than usual. (2) During the last hour of trading, investors have to settle their positions for the night. More
hares are traded and volatility increases. This latter effect stems from the fact that investors who are eager to trade before the end of the day are ready to pay some market impact, rather
han not having their trades executed. This market impact generates unpredictable moves in the market price, decreasing the level of certainty on the price that can be traded. (3) ForEuropean markets, North American news and the opening of North American exchanges have an impact on the intra-day rhythm: a peak in volume and volatility can be observed one hour
before the opening of US exchanges, and once open, traded volumes increase.
Slices are then sent to the market within this envelope (more aggressively when the execution curve is close to the minimum boundary,and more passively when it is close to the maximum one).The trading envelopes are computed in real time using usual volume curves, usual volatility curves and market impact models.
Mechanism 2: optimal adjustment of price and quantity to adapt to market conditions
Most o our benchmark algorithms have a eature enabling them to react to intra-day volatility changes. Our CrossFire algorithm alsouses such a mechanism to capture liquidity on any combination o lit and dark venues, adjusting prices and rebalancing quantitiesn order to take into account market lows. As in the case o trading envelopes, this eature is derived rom state-o-the-art research,namely the high-requency component o the Almgren - Chriss ramework3.
This mechanism is based on two empirical acts: irstly, volatility is a good proxy or a real spread and can thus be used to choosehe optimal price o a passive order. Secondly, since volatility is a non-directional measurement, it has to be accompanied by theexecution low that is in practice captured by an algorithm at a given level o price (the aster an order is executed, the more likelyhe market is moving in your direction). The combination o volatility (public inormation) and your ill rate (private inormation) providesa methodical way to control the price levels and the size o the slices o the algorithms.
OUR ALGORITHMS ARE BASED ON TWO MAIN MECHANISMS:
Mechanism 1: on-the-fly computation of trading envelopesThese trading boundaries are based on our recent continuation o the original work o Almgren and Chriss1 showing that it is possibleo build optimal trading curves or almost any benchmark2.Optimal highest and lowest execution rates are computed; such rates vary with time (Figure 1).
90
80
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60
50
40
30
20
10
0
100
P
ourcentage
10:04 10:26 10:28 11:09 11:31 11:52 12:14 12:36 12:57 13:19 13:40 14:02
Aggressive contributions to avoid
missing quantities
Stop contributing to avoid going too fast
Figure 1: The monitoring of a real order: the
trading curve is in red, the trading envelope in
dark blue, the market curve in light blue (as a
percentage, it can only be known at the end
of the trading period, but is plotted here as a
post-trade reference), and our execution curve
in black.
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LIQUIDITY SEEKER
CROSSFIRE p6
POUNCE p7HUNT p8-9
ICEBERG p10
M.O.C. p11
BENCHMARK
VWAP % VOLUME p14-15
SLIDING VOLUME % p16-17
IMPLEMENTATION SHORTFALL p18-19
TWAP
IN LINE p22-23
TARGET CLOSE p24
PAIR TRADING p25
TABLE OF
CONTENTS
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BUY 250,000 WEIR LN (WEIR GROUP) AT 995P.
WOULD BE INPUT ASBUY 250,000 WEIR LN CrossFire StartTime 09:25 End Time 16:15 Limit 995p
EXAMPLE
CrossFire
FACTSHEET
L
IQUIDITYSEEKER
6
STRATEGYDESCRIPTIONCrossFire is a liquidity-capturing algorithm that will allow you to take advantage o hidden liquidity within darkvenues.Its primary aim is to execute the order as quickly as possible, at the best available price, while minimisingmarket impact and inormation leakage. It does this by posting only in dark liquidity venues, while also provi-ding the option to sweep lit venues, when directed.
When posting at dark venues, the algorithm will analyse participation within the various venues that are pro-viding the most liquidity and reallocate orders to optimise perormance.
AVAILABLEPARAMETERSPERIOD (START-TIME & END-TIME)
- Used to speciy time period over which the order isworked.
LIMIT
- MANDATORY Used to put a price constraint on the order so that tradingonly occurs within this limit.
PRICE STRATEGY
- Midpoint.
QUANTITATIVEMODELCrossFire allows the trader to send an IOC at a marketable limit to multiple ATSs, or dark pools. This takesadvantage o any possible hidden liquidity in these new vehicles. Prior to entering the order, CrossFire allows the trader
to decide what to do with the balance o the order ollowing the initial IOCs. Options include repeatedly hitting the ATSswith IOCs, posting to ATSs, posting the balance to the smart order router (or another algorithm), or releasing the balanceback to the trader to work as he sees t. CrossFire also allows the trader to split part o the order to standard lit marketsto take advantage o all possible liquidity.
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7
EXAMPLE Buy 250,000 WYE, sweep aggressively when the price is avorable and get donein dark pools i possible.
WOULD BE INPUT ASBuy 250,000 WYE POUNCE Start Time 15:50 End time 16:00
Dark Pools YES Aggressive
PounceUS ONLY
FACTSHEET
L
IQUIDITYSEEKER
STRATEGYDESCRIPTIONPounce intelligently lls an order using a air price model.
AVAILABLE
PARAMETERSPERIOD (START-TIME & END-TIME)
- Used to speciy time period over which the order isworked .
LIMIT
- Used to put a price constraint on the order so that tradingonly occurs within this limit.
DARK POOLS
- Access dark pools.
URGENCY
- Urgency o the order. Choose between Normal orAggressive.
QUANTITATIVEMODEL
The Pounce strategy works an order by watching the tape and rapidly jumping on avorable price opportunities.Using a robust, short-term air price model, it determines when to hit or take, trying not to move the market unnecessarily.Pounce will interact with standard marketplaces, dark pools, or a combination o both.
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Buy 100,000 ACA, get whatever you can until New York opens without being inthe market, dont act i there are ewer than 500 shares on display and dont paymore than 31.30.
WOULD BE INPUT ASBuy 100,000 ACA HUNT Start-Time 9:00 LET End-Time: 15:30 LET Min Size 500 Limit 31.30
EXAMPLE
HUNTMULTI-VENUE MODE EUROPE ONLY
8
FACTSHEET
L
IQUIDITYSEEKER
STRATEGY DESCRIPTION
Systematically hits the specied price. In other words, it provides the possibility o entering a limited buyor sell order without being visible in the market. As soon asshares are oered/bid at the specied price, itshoots. This algorithm is particularly useul or illiquid stocks.
Now available in multi-venue mode:
I the ront-end execution execution venue eld is not populated, the algo will assume that you want to takeliquidity on every available venue. The order will then be worked accordingly
AVAILABLE PARAMETERSPERIOD (START-TIME & END-TIME)
-Used to speciy the execution period over which Hunt isto work.
LIMIT
- Used to speciy the price level at which Hunt should lit theoer/hit the bid.
MIN SIZE
- Used to speciy a minimum shooting size to avoid payingthe spread or small quantities and to allow the market torebuild sucient depth.
- I not lled, the Algo will use the stocks ATS.
QUANTITATIVE MODELThe algorithm works like a hidden sniper, constantly watching a specic bid/oer and entering Fill And Kill orders when thespecied Min Size appears, up to the specied level.I end time is past the close, the Hunt sends the amount not lled in the auction, as a strict order at limit price.
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HUNTMULTI-VENUE MODE
9
USER
GUIDE
L
IQUIDITYSEEKER
EXECUTION PROFILE
When the min size tradeis reached, get it done
Volume on the ar touch
Our trade
EXAMPLE
Hunt Buy Order is triggered with Limit 25.22& Minimum Size 500 Because o the minimum size at 500,the oer remains untouched
4 1 160 25.20 25.22 200 1
2 302 25.19 25.23 1 254 2
3 814 25.18 25.24 868 3
3 1 300 25.17 25.25 2 988 6
1 356 25.16 25.27 2 000 1
A sell order or 350 @ 25.21 arrives.Hunt wakes up as there is an opportunity to lit the oerat the required limit
4 1 160 25.20 25.21 350 1
2 302 25.19 25.22 200 1
3 814 25.18 25.23 1 254 2
3 1 300 25.17 25.24 868 3
1 356 25.16 25.25 2 988 6
In multi-venue mode, the order book in this examplewould be a consolidated order book o all available venues.
Hunt has bought 550 shares(200 @ 25.22 & 350 @ 25.21)
4 1 160 25.20 25.23 1 254 2
2 302 25.19 25.24 868 3
3 814 25.18 25.25 2 988 6
3 1 300 25.17 25.27 2 000 1
1 356 25.16 25.28 997 1
OUR RECOMMENDATIONSHUNT Algo is particularly suited or illiquid stocks
The trigger size is also critical or the set-up o the Algo:- I its too small, the HUNT will fre too oten and will be easily identifed- I its too wide, the HUNT will never fre, and will not take advantage o liquidity
and especially hidden orders
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Buy 100,000 ACA at 31.50 showing 5,000 at a time, good or the day.
WOULD BE INPUT AS
Buy 100,000 ACA ICEBERG Start-Time 9:00 LET End-Time: 17:30 LET Limit 31.30 Display Size 5,000
EXAMPLE
IcebergMULTI-VENUE MODE EUROPE ONLY
FACTSHEET
L
IQUIDITYSEEKER
10
STRATEGYDESCRIPTIONReproduces an Iceberg order, i.e. to show a smaller portion o the order to the market than the total ordersize. This strategy is useul or exchanges that dont support Iceberg orders.
Now available in multi-venue mode:
I the ront-end execution execution venue eld is not populated, the algo will assume that you want to takeliquidity on every available venue. The order will then be worked accordingly.
AVAILABLEPARAMETERSPERIOD (START-TIME & END-TIME)
- Used to speciy the execution period over which the Icebergis to be worked.
LIMIT
- Required to indicate the price at which orders should beplaced in the order book.
DISPLAY SIZE
- Used to speciy the size that has to be shown on the orderbook.
- I not lled, the algo will use the stocks ATS.
QUANTITATIVEMODELThe algorithm places a limit order with the dened price and quantity. Once this order is lled, the algorithm automaticallynters another slice with the same parameters as the rst, and so on until the order is completed.I end time is past the close, the Iceberg sends the amount not lled in the auction, as a strict order at limit price.
OUR RECOMMENDATIONS
The Iceberg strategy mimics
an Iceberg order- It is not exactly like a
market iceberg:
it works as a refll orderClassic Iceberg order:i possible, the entire
order is flled
Display size
Display size
Cheuvreux Iceberg Algo: when a slice is done,another slice is placed automatically.The priority rank may be lostThe price may also have changed
NB: I the market place supports Iceberg orders, a real Iceberg market order will be sent by the algo
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11
BUY 20,000 National Bank o Greece at limit 15 during the closing xing.
WOULD BE INPUT AS
Buy 20,000 ETE GA Market on Close LMT 15.00
EXAMPLE
M.O.C EUROPE ONLY
FACTSHEET
L
IQUIDITYSEEKER
STRATEGY DESCRIPTION
Submits an at market or limit order (as directed) into the closing auction o the directed market. Orders canbe submitted at any point during the day and the algorithm is particularly useul or exchanges that do notaccept auction orders in advance o the close. The algorithm will work on the more than 20 markets whereAlgos are available.
AVAILABLE PARAMETERSLIMIT
- Required to indicate the limit price at which the order willbe placed in the order book.
QUANTITATIVE MODELThe algorithm waits or the time trigger to send the order with the dened price and quantity.
EXECUTION PROFILE
MOC places the order in theclosing auction
Price
Actual Traded Volume
Strategy Participation Rate
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Buy 100,000 ACA working rom when New York opens until the French market closes,try to match VWAP but limit the volume participation to 20% and i the price alls to 31.30, nish it.
WOULD BE INPUT ASBuy 100,000 ACA VWAP Start Time 15:30 LET End-Time: 17:30 LET
Max % Volume : 20
Would Level 31.30
EXAMPLE
VWAP ALL REGIONS
12
FACTSHEET
BENC
HMARK
STRATEGY DESCRIPTION
Attempts to match the VWAP (Volume Weighted Average Price) over a dened time period.
AVAILABLE PARAMETERSPERIOD (START-TIME & END-TIME)
- Used to speciy the execution period over which VWAPorder has to be worked (e.g. to avoid the opening/closingauction or start the order at a later time, etc.). An overthe-session order, by deault, will exclude the auctions.
LIMIT
- Used to speciy price constraints. In such a case the ordermay not be nished at the end o the period.
MAX % VOLUME
- Used to control Market Impact by limiting the volumeparticipation rate. In such a case the order may not benished at the end o the period.
WOULD LEVEL
- Used to enter a level at which the algorithm attempts tocomplete the order.
- I the order is lled at the Would Level, at the end o theperiod the VWAP may signicantly dier rom the reportedprice.
QUANTITATIVE MODELThe algorithm slices the order according to the historical volume-curve per stock. Volume curves are adjusted intra-dayin cases where signicant dierences between intra-day and historical volume-curves are detected. When a limit is used,should the stock trade within the limit price, the algorithm will work along its volume curve.
But i the stock trades outside the limit price, the algorithm will stop trading, waiting or the price to come back within thelimit. Upon returning to the limit, the algorithm will work the balance o the order in line with the volume curve or theremaining quantity. Limit-order placement is optimised to avoid paying too much o the spread, whilst trying to keep upwith the volume curve.
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VWAP
13
USER
GUIDE
BENC
HMARK
EXECUTION PROFILE
Changes in price and volumetraded have no eect on the strategy.
Price
Actual Traded Volume
Historical Volume Pattern
Strategy Participation Rate
VOLUME CURVE CALCULATION
For liquid stocks (~600 European stocks), a volume curve is calculated or each stock, every night, based on the past 60days o trading (statistically optimised by our quant research team). The curve can be modifed at any time by the trader.
PARAMETERS IMPACT
END TIMEI the end time includes the fxing, a quantity (calculated in unction o the average quantity traded at fxing,
over the past 60 days) is sent to the market at fxing.
VOLUME DELAYIn case o volume delay (due to a limit), the delay can be treated in 2 dierent ways:
-Volume catch-up: the volume delay is caught up as soon as possible. This is the deault mode.Warning: this could create a resistance on which the stock can rebound.
-Volume re-sliced: the slices o volume are re-calculated, the volume to catch up is spread over the remainingslices. This smoothes the volume catch-up. To select this mode, the trader has to stop and restart the Algo.
Limit
Delayis taken
Volume catch-up. The volume can also
be spread on the remaining periods
Limit
For a buy order, i the price goes above
the Limit, the algo stops participating. In this case, thereis a risk that the order will not be nished
Price
Actual Traded Volume
Historical Volume Pattern
Strategy Participation Rate
OUR RECOMMENDATIONSVWAP Algo is particularly suited
in ollowing trading situations:
- Trader has no vision on the momentum(expected price variation)
- Trader wants to l imit market impact- Trader wants to be sure to fnish the order
RECOMMENDATIONSet up a max % volume limit to prevent market impact,
especially during low activity periods.
The Max % Volume caps the participation rate.I the parameter is set too tight, there is a riskthat the order will not be nished
Price
Actual Traded Volume
Historical Volume Pattern
Strategy Participation Rate
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Buy 100,000 ACA, participate at 33% o volume, but stop it at 15:00 i there is not enough liquidityto nish it beore, dont pay more than 31.30 and i the price alls to 31.15, nish it. Be aggressive.
WOULD BE INPUT ASBuy 100,000 ACA % VOLUME Start-Time 9:00 LET End Time: 15:00 LETMax % Volume: 33 Limit 31.30 Would 31.15 ExecStyle Aggressive
EXAMPLE
% Volume ALL REGIONS
FACTSHEET
BENC
HMARK
14
STRATEGYDESCRIPTIONExecution in line with prevailing volume at a target participation rate until the order is completed.
AVAILABLEPARAMETERS
PERIOD (START-TIME & END-TIME)End-Time is used to stop the order at a specic time i therehas not been enough liquidity to complete it at the targetparticipation rate.
LIMIT
Used to put a price constraint on the order so that tradingonly occurs within this limit.
MAX % VOLUME
Used to speciy the target participation rate.The algorithm automatically caps this eld at 50% o the volume. The 50% cap can be overridden manually withinCheuvreux upon request.
WOULD LEVELUsed to enter a level at which the algorithm attempts tocomplete the order.
EXECUTION STYLE
This parameter determines the trade-o between improvingthe execution price (placing instead o paying the spread)and adhering to the volume participation rate.Four levels are available : Very aggressive (adheres as closeas possible to the participation rate; more likely to pay thespread), Aggressive, Neutral, Passive (tries to improve theexecution price; more likely to be behind the participationrate; less likely to pay the spread.)
QUANTITATIVEMODELThe algorithm tracks the real-time market volume and tries to match the target participation rate. I the price does notmove, the algorithm places orders to avoid paying the spread unnecessarily. The algorithm dynamically calculates theexecution spread, i.e. the maximum discretion to pay the spread in order to catch up on volume.
When a stock is listed on multiple markets, the perormance will generally be better on the exchange where liquidity is
highest.
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% Volume
USER
GUIDE
BENC
HMARK
15
EXECUTION PROFILE
Time
Volume
Price
Changes in price haveNO eect on the strategy
Actual Traded Volume
Strategy Participation Rate
PARAMETERS IMPACT
EXECUTION STYLEThis parameter xes the tolerance o the Algo with the target participation rate.The more aggressive it is, the more the Algo will cross the spread to get the volume at best opposite price.
Targetparticipation rate
Tolerance
PASSIVE
NEUTRAL
AGRESSIVE
VERY AGRESSIVE
No delay on the participation rate;the Algo has the ability to take some advance.
Spread is crossed more oten; risk to deteriorateprice perormance
Mostly used or relative small orders, on liquid stocksTry to capture the spread and obtain a good price; no pressureon the volume risk to be behind the participation rate
That tolerance is calculated as a unction o the stock, the average spread and the proximity with the limit. The spreadwe accept to pay i we are behind the volume (the Execution Spread) depends on the Execution Style:
WOULD LEVELFor a buy order, i the price alls below this limit,the Algo tries to nish the order
LIMITFor a buy order, i the price goes above this limit,the Algo stops participating
ExecSpread = AverageBidAskSpread * ExecutionStyleFactor
Calculated as the AverageBidAskSpread,on the period where the Algo has been late
Increases with the aggressivenesso the Execution style selected
Price
Actual Traded VolumeStrategy Participation Rate
OUR RECOMMENDATIONS
THE EXECUTION STYLEis modiable during theunctioning o the Algo.I the volatility increases,it is recommended topush the execution styleto a more aggressivestyle, to ollow theincrease o volume.
FAVOUR VOLUME
Unavourablemomentum
FAVOUR PRICE
Neutralmomentum
Favourablemomentum
Passiv
e
Passive
Neutra
l very
Aggres
sive
Aggres
sive
very
Aggres
sive
very
Aggre
ssiv
e
Pas
sive
Neutra
l
Aggres
siveNeutra
l
Aggres
sive
VERY GOOD PRICESIGNIFICANT RISK ON
VOLUME
VERY GOOD VOLUME TRACKINGSIGNIFICANT RISK ON PRICE
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Sliding Volume % EUROPE ONLY
Buy 100,000 ACA, participate at 33% o the volume or the current price, accelerate to 50% i theprice alls to 22.20, slow down to 10% i the price moves towards 22.80.
WOULD BE INPUT AS
Buy 100,00 ACA SVP Start time 9:00 LET End Time 15:00 LET Max % Volume 50.Re % volume 33 Min % vol. 10 Limit 22.80 Would 22.20 Re price 22.40
EXAMPLE
FACTSHEET
BENC
HMARK
16
STRATEGYDESCRIPTIONSVP (Sliding Volume Participation) automatically adjusts the targeted participation rate according to the priceuntil the order is completed.
AVAILABLE
PARAMETERSPERIOD (START-TIME & END-TIME)
- End-Time is used to stop the order at a specic time i therehas not been enough liquidity to complete it in the price range.
ORDER ENTRY PRICE
- It is the price o the target participation rate.
REF % VOLUME
- Used to speciy the target participation rate (at the money).
LIMIT PRICE
- Used to put a price constraint on the order so that theparticipation rate varies rom that limit towards the orderentry price.
WOULD LEVEL
- Used to put a price constraint on the order so that theparticipation rate varies rom that Would Level towardsthe order entry price.
- Min and Max %Volume can also be parametered.
QUANTITATIVE MODELThe algorithm tracks the real-time market volume and tries to match the participation rate which adjusts itsel accordingto price movements between the pre-dened Limit/Would price band.
EXECUTION PROFILE
Price
Order Entry price
Strategy Participation Rate
Participation slows downas price rises above the orderentry price
Participation increases as price movein your avour
BUY ORDER
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Sliding Volume %
USER
GUIDE
BENC
HMARK
17
EXECUTION PROFILE
Deault values (min and max % volume) can be changed,or any customer requirement
In addition to the time parameters, 6 parametershave to be dened, to personalize the algo at yourconvenience:
PRICEPARAMETERS
Limit Price
Order Entry Price
Would Level
PARTICIPATION RATEPARAMETERS
Min %Volume (deault value 10%)
Re %Volume
Max %Volume (deault value 50%)
Price
COMMON CONFIGURATION:
Limit
Order EntryPrice
Would Level
Min% Volume
Targeted% Volume
Max% Volume
Participationrate
OTHER SUGGESTED CONFIGURATIONS
SVP can be parametered to unction in a large variety o ways:
Price
Participation rate
Constant participation rate out o the money Extra aggressiveness in the money
Participation rate
Price
Constant participation rate in the money Extra aggressiveness out o the money
Participation rate
Price
Low participation rate at the money Extra aggressiveness out and in the money
PARAMETERS IMPACT
For a buy order, i the price alls below this level, the Algo
tries to fnish the order
For a buy order, i the price goes above the limit,
the Algo stops participating
Would Level
Limit Price
Price
Order Entry price
Strategy Participation Rate
OUR RECOMMENDATIONS
The limits are set too wide. No signifcant dierence in termo perormance between the SVP and the %Volume Algo
Price
Like all limited orders, limits must be re-adjusted in caseo price variation. Otherwise, the order may not be fnished.
Price
The SVP works as a meanreversion capture Algo
The parameters o the SVP Algo allow you to emulate an IS Algo, oering more sensibility to your own
constraints. It is perect to capture the mean reversion, in stable market conditions.
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Implementation ShortallALL REGIONS
Buy 100,000 ACA. Target the arrival price.
WOULD BE INPUT ASBuy 100,000 ACA IS
EXAMPLE
18
FACTSHEET
BENC
HMARK
STRATEGYDESCRIPTION
The main sources o uncertainty that have to be assessed to successully manage an implementationshortall strategy are the market risk and the price impact o the orders to be executed.Minimizing the possible negative eects o the market risk on the trades is already handled by VWAP andother low percentage o volume algorithms, perorming systematic and regular executions.Bringing price impact under control is very specic to implementation shortall algorithms. The algorithm mustbe able to quantiy the potential movements o the price caused by a given volume in a given stock at a givenhour o the day. Implementation Shortall (IS) automatically replicates the traders behaviour around market
impact and volatility risk and adjusts its participation rate accordingly, increasing it noticeably when the stocktrades in the money versus the Arrival Price. The algorithm is designed to require minimum input rom the user.
AVAILABLE PARAMETERSPERIOD (START-TIME & END-TIME)
- End-Time is used to stop the order at a specic time ithere has not been enough liquidity to complete it in theprice range.
LIMIT
- Used to put a price constraint on the order so that tradingonly occurs within this limit.
WOULD LEVEL
- Used to enter a level at which the algorithm attempts tocomplete the order.
EXECUTION STYLE
- This parameter determines the curve o the execution proleand the trade-o between limiting the market impact andreducing the time to market by increasing the participationrate.
- Four levels are available: very aggressive, aggressive, neutraland passive ; the more aggressive, the quicker the strategywill be implemented and the volatility risk reduced. On theother hand, reducing the aggressiveness reduces thepotential market impact o the strategy while increasing thevolatility risk.
QUANTITATIVE MODELEach time the IS algorithm is used, it builds an on the fy nonparametric model o the price impact or the order. Based onhistorical data o the behavior o the price under similar conditions, this model computes a trading range in which the price islikely to stay during the trade.
The IS algorithm combines this trading range with other parameters to calibrate the
volume to deal at each price level, so that more volume will be traded when there is a
low probability to trade in a price impact zone, and less volume will be traded when
the probability o price impact is high. This combination o trading range and volume
to be executed lowers the probability o price impact.
Real-time indicators and historic reerences are computed and, when necessary,
trigger a re-determination o the trading range.
THE TRADING RANGE DEPENDS ON:
- The security (Volatility, mean spread, marketmicro-structure)
- The order (Size o the order compared tohistorical traded volume, time o arrival on themarket)
- The Execution Style
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Implementation Shortall
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USER
GUIDE
BENC
HMARK
EXECUTION PROFILE
Participationincreases asprice moves in
your avour
Participation slowsdown as pricerises above theorder entry price
BUY ORDER
Price
Time
Tradingrange
2 and reassessesit when necessary
1 IS algo determinesthe trading range
Price
Trading Range
Strategy Participation Rate
PARAMETERS IMPACT
ALL PARAMETERS ARE OPTIONALThe only input needed rom the user: Buy/Sell, Quantity, Stock
EXECUTION STYLE
The Execution Style will aect the unctioning o the strategy in two ways:
- Speed o strategy implementation.The more aggressive the style, the bigger the participation rate would be.The risk o market impact will be increased, but the order may be nished quicker.
- Management o the order book positioning o the various slices.
WOULD LEVELFor a buy order,i the price allsbelow this level, the Algo tries tonish the order
LIMITFor a buy order, i the pricegoes above the limit,the Algo stops participating
Would Level
Order Entry Price
Price
Strategy Participation Rate
Limit Price
Order Entry Price
Price
Strategy Participation Rate
OUR RECOMMENDATIONSThe IS strategy is used or orders that are benchmarked versus the Arrival Price.
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Buy 100,000 ACA during the next hour, dont pay more than 31.30 and i the price alls to 31.15,nish it.
WOULD BE INPUT ASBuy 100 000 ACA TWAP Start-Time 11:00 LET End-Time: 12:00 LET Limit 31.30
Would 31.15
EXAMPLE
TWAP ALL REGIONS
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FACTSHEET
BENC
HMARK
STRATEGY DESCRIPTION
Executes an order using time-linear slicing, i.e. worked in equal slices across the specied time rame.
AVAILABLE PARAMETERSPERIOD (START-TIME & END-TIME)
- Used to speciy the execution period over which TWAP(Time-Weighted Average Price) is to be worked.
LIMIT
- Used to place price constraints on the order. In such acase the order may not be nished at the end o the period.
MAX % VOLUME
- Used to control Market Impact by limiting the volumeparticipation rate. In such a case the order may not benished at the end o the period.
WOULD LEVEL
- Used to enter a level at which the algorithm attempts tocomplete the order.
- I the order is lled at the Would Level, at the end o theperiod the TWAP may signicantly dier rom the reportedprice.
QUANTITATIVE MODELSame model as the VWAP algorithm except that the volume curve is fat; thereore the order is sliced according to time (e.g.or an order that is to be worked over one hour, 25% will be completed ater 15 minutes).
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TWAP
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USER
GUIDE
BENC
HMARK
EXECUTION PROFILE
Changes in price and volume traded haveNO eect on the strategy
Price
Actual Traded Volume
Strategy Participation Rate
PARAMETERS IMPACT
END TIMEI the end time includes the fxing, a last slice is sent to the market at fxing.
Limit
LIMIT
For a buy order, i the price moves above the Limit,the algo stops participating. In this case, there is arisk that the order willnot be nished
COMPARISON TWAP/VWAP
I the price alls at the end o the day (buyorder), perormance will be better with a VWAP
Algo, as it over-weights the end o the day
Price
Actual Traded Volume
Strategy Participation Rate
VOLUME DELAYWorks on the same principle as the VWAP Algo. I the order is behind the volume, due to a price limit,
then the Algo will try to catch up as soon as the price comes back to its limit, or a new curve can be calculated
to spread the balance o the order over the rest o the trading period; this would require trader intervention.
OUR RECOMMENDATIONS
I you are buying and you expect the price to rise
ater NY open, using TWAP will give you an average
price better than VWAP, as you will make more volume
beore NY opening than VWAP.
RECOMMENDATIONSet up a max % volume limit to prevent market impact,especially during low activity periods.
The Max % Volume caps theparticipation rate. I the parameteris set too tight, there is a risk thatthe order will not be nished
Price
Strategy Participation Rate
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EXAMPLEBuy 100,000 ACA In Line.WOULD BE INPUT ASBuy 100,000 ACA In Line
In Line EUROPE ONLY
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FACTSHEET
BENC
HMARK
STRATEGYDESCRIPTIONIn Line automatically replicates the traders behaviour around market impact and volatility risk and adjusts itsparticipation rate accordingly, increasing it noticeably when the stock trades in the money versus the ArrivalPrice.The algorithm is designed to require minimum input rom the user.
AVAILABLE PARAMETERSPERIOD (START-TIME & END-TIME)
-End-Time is used to stop the order at a specic time ithere has not been enough liquidity to complete it in theprice range.
LIMIT
- Used to put a price constraint on the order so that tradingonly occurs within this limit.
REF PRICE
- Used to enter a level at which the algorithm switches to axed participation rate.
WOULD LEVEL
- Used to enter a level at which the algorithm attempts tocomplete the order.
EXECUTION STYLE
- This parameter determines the curve o the execution proleand the trade-o between limiting the market impact andreducing the time to market by increasing the participationrate.
- Four levels are available: very aggressive, aggressive, neu-tral and passive ; the more aggressive, the quicker thestrategy will be implemented and the volatility risk reduced.On the other hand, reducing the aggressiveness reducesthe potential market impact o the strategy while increasingthe volatility risk.
QUANTITATIVE MODELEach time the In Line algorithm is used, it builds an on the fy nonparametric model o the price impact or the order. Basedon historical data o the behavior o the price under similar conditions, this model computes a trading range in which the priceis likely to stay during the trade.
THE TRADING RANGE DEPENDS ON:
- The security (Volatility, mean spread, market micro-structure)- The order (Size o the order compared to historical traded volume, time o arrival on the market)- The Execution Style
Ater that submission phase, the trading range is not re-determined. The participation rate remains constant above the traderprice (buy order), and the Algo has a module that manages extra-aggressiveness on top o the determined volume participationrate when in the money (under the Re Price) (see next slide).
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In Line
23
USER
GUIDE
BENC
HMARK
EXECUTION PROFILE
The slopes o the execution prole depend upon the Execution style
BUY ORDER
Participation rate
Price
(aggressiveness)Extra aggressiveness in the moneyadded to the original slope
by liquidity sweep module
TraderPrice
Would
Re Price
PARAMETERS IMPACT
ALL PARAMETERS ARE OPTIONALThe only input needed rom the user: Buy/Sell, Quantity, Stock
EXECUTION STYLE
The Execution Style will aect the unctioning o the strategy in two ways:Speed o strategy implementation. The more aggressive the style, the bigger the participation rate would be. The risk o market
impact will be increased, but the order may be nished quicker.Management o the order book positioning o the various slices.
WOULD LEVELFor a buy order, i the price allsbelow this level, the Algo tries tonish the order
LIMITFor a buy order, i the price goesabove the limit, the Algo stopsparticipating
Would Level
Order Entry Price
Price
Strategy Participation Rate
Limit Price
Order Entry Price
Price
Strategy Participation Rate
Under the Re price, the Algo will sweep available liquidity at careully intervals, allowing the order book to restructurebeore ring.
OUR RECOMMENDATIONSThe In Line strategy is used or orders that are benchmarked versus the Arrival Price.
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EXAMPLEBuy 100,000 ACA. Target the closing price.
WOULD BE INPUT ASBuy 100,000 ACA Target Close
Target Close EUROPE & US ONLY
FACTSHEET
BENC
HMARK
STRATEGY DESCRIPTION
The main sources o uncertainty that have to be assessed to successully manage an implementation shortallstrategy are the market risk and the price impact o the orders to be executed.Minimizing the possible negative eects o the market risk on the trades is already handled by VWAP andother low percentage o volume algorithms, perorming systematic and regular executions.Bringing price impact under control is very specic to implementation shortall algorithms. The algorithm mustbe able to quantiy the potential movements o the price caused by a given volume in a given stock at a givenhour o the day.The Target Close algorithm manages the market impact on the closing xing by optimising the start time othe order.The algorithm is designed to require minimum input rom the user.
AVAILABLE PARAMETERSLIMIT
- Used to put a price constraint on the order so that tradingonly occurs within this limit.
CONTINUOUS %VOL
- Used to put a cap on the percentage o the volume incontinuous trading. The balance o the order will beexecuted at the xing.
AUCTION %VOL
- Algo will leave a maximum o that percentage o historicalauction volume. The deault is set up at 30%.
EXECUTION STYLE
- This parameter determines the prole o the executioncurve and the trade-o between limiting the market impactand reducing the time to market by increasing theparticipation rate at the closing xing.
- Four levels are available: very aggressive, aggressive, neutraland passive ; the more aggressive, the later the strategy will beimplemented and the volatility risk reduced. On the other hand,reducing the aggressiveness reduces the potential marketimpact o the strategy while increasing the volatility risk.
QUANTITATIVE MODEL
When Target Close receives an order, it determines theappropriate start time and execution curve to obtain an
average price as close as possible to the departure price.
Target Close algo determines the optimal start time o thestrategy, and the curve o execution, depending on theparameters o the order.
13:00
13:15
13:30
13:45
14:00
14:15
14:30
14:45
15:00
15:15
15:30
15:45
16:00
16:15
16:30
S1
S3
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
70,0%
80,0%
90,0%
100,0%
Percentage
done
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EXAMPLEBUY 100,000 FRANCE TELECOM
SELL 800,000 BRITISH TELECOMWHEN (FTE.PA / BT.L) < = 7.8574
Pair TradingEUROPE & US ONLY
FACTSHEET
STRATEGY DESCRIPTION
CA Cheuvreux has a dedicated team o pairs traders to oer an ecient and proessional service. Our PairTrading solution continuously monitors the market prices or the securities involved in a Pair or Spread trade.The system will look to buy and sell the relevant equities when the client dened spread/ratio/premium ordiscount can be achieved. The Algorithm can be adjusted by using liquidity restraints to maximise volume orprice advantage, lowering impact and increasing the chances o successul trade completion. The systemcan take volume rom the Bid and Ask as well as the Hit/Lit levels.
AVAILABLE PARAMETERSLEG A AND LEG B
- Used to speciy the two stocks to trade against each other.
PAIR TYPE
- Used to speciy the type o pair: ratio, spread or premium pair.- Note that the system is able to trade cross-currency pairs with FX
hedging.
Trades can be weighted using share multipliers, cash amounts, FX levels or any combination o the three. The system is fexibleenough to cope with Risk/Merger Arbitrage pairs, Statistical Arbitrage and Long/Short trades in related securities. The algorithmemploys sophisticated leg management, allowing completion o one leg tranche rst depending on liquidity, or enabling a maxVolume % on the legs in order to minimise impact should it be required.
WITH THIS STRATEGY, ONE STOCK IS TRADED VERSUS ANOTHER,
DEPENDING ON YOUR CHOICE OF DIFFERENT PARAMETERS:
- Ratio pairs: the ratio between the two stocks (A / B)- Spread pairs: the spread between the two stocks (A - B)- Premium pairs: combining the ratio with a premium: ((A / B) + x)- Share multipliers and cash amounts can be incorporated into these basic calculations.
NB: Pairs Trading is not yet available via ront-ends: Please call Cheuvreux Pair Trading Desk in Paris (+33 1 41 89 77 77)or London (+44 207 621 5289)
QUANTITATIVE MODELThe traders use a system that they can ully parameter according to your needs. The system uses order book inormation andstate-o-the-art trading algorithms to monitor and automate the execution o pairs orders as much or as little as the trader
requires.
The algo looks beyond the bid and ask to accurately assess where it should be in the market, reducing your impact andimproving your execution, while leaving you in ull control o the degree o risk you take. When a pair reaches your level, thesystem reacts in milliseconds to place the right orders at the right levels to provide you with excellent executions.It also includes specic eatures to allow you to manage your oreign exchange exposure.
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This document is provided or general inormation purposes only and does not constitute a denitive and valid document having a contractual value, or beingconsidered as any supplement or amendment to a ormer agreement. This text is exclusively directed to Crdit Agricole Cheuvreuxs Eligible Counterpartiesand Proessional Clients or prospect. Services reerred herein are not available to Retail Clients. It is not to be construed as a solicitation or an oer to buy orsell any nancial instruments This inormation is prevailing as at the date o publication and is subject to change, without notice, to refect subsequentdevelopments. No liability is accepted by Crdit Agricole Cheuvreux that may arise rom any use o this material. This document and its contents are proprietaryto Crdit Agricole Cheuvreux, and no part o this document or its subject matter may be reproduced, disseminated or disclosed without the prior written
approval o Crdit Agricole Cheuvreux. The distribution o this document in other jurisdictions outside o EEA (European Economic Area) may be restricted bylaw, and persons into whose possession this document comes should inorm themselves about, and observe, any such restrictions.In the United States oAmerica, the oregoing inormation is solely intended or distribution to U.S. institutional investors and major U.S. institutional investors ("U.S. Clients"), as denedin Rule 15a-6 o the Securities Exchange Act o 1934. This inormation describes nancial products and strategies marketed by the Crdit Agricole CheuvreuxGroup including Crdit Agricole Cheuvreux S.A. ("CACSA") and other oreign aliates o Crdit Agricole Cheuvreux North America, Inc. ("CACNA"). CACNA,
www.cheuvreux.com - September 2011