Transcript One- to Two-Line Presentation Title – Arial 26pt. Regular
Algorithmic Trading Equity Trading vs. Futures Trading
Morgan Stanley Institutional Securities
This material has been prepared for information purposes to support the promotion or marketing of the transaction or matters addressed herein. It is not a solicitation of any offer to buy or sell any security, commodity or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Morgan Stanley research department. It was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Past performance is not necessarily a guide to future performance. Please see additional important information and qualifications at the end of this material.
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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
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trends Behind Algorithm Trading Regulatory Changes Electronification of Markets Improve Scale & Efficiency Desire for Anonymity
EQUITIES
FUTURES
–
Realization that Trading Is a Source of “Incremental Alpha” Desire to Reduce Explicit and Implicit Trading Costs
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Impact of Algorithms on Traders
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“Algorithms are productivity tools” “Algorithms are just
ONE
of the tools available…”
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade Lifecycle
TCA Execution Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade Lifecycle
EQUITIES
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FUTURES
Execution Evaluation Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Execution Evaluation
Spectrum of Difficulty
Volume Significant Event Time of Day Time Volatility Time Size of Trade Global Economic Events
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Execution Evaluation: Fit the Algorithm to the Strategy
Liquidity Urgency Trade Size Single Algorithms Multiple Algorithms Algorithm & DMA Algorithm & Trader Price Limits Application of Constraints Volume Limits Time Limits
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade Lifecycle
EQUITIES
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FUTURES
Benchmark Determination Execution Evaluation Benchmark Determination Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Benchmark Determination
Order(s) Trade Structure Development
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More Structure Schedule Based
VWAP TWAP
Flexible
Volume Participation
Less Structure Dynamic
Arrival Price Price React
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade Lifecycle
EQUITIES
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FUTURES
Trade/Trajectory Planning Benchmark Determination Execution Evaluation Trade/Trajectory Planning Benchmark Determination Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade/Trajectory Planning
TCA Execution Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation Parameters Available for VWAP are:
1. Price Limits 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.
Volume distributions are determined by country and adjusted for seasonal factors such as expiration days, and month/quarter ends. The BXS VWAP strategy attempts to minimize shortfall versus VWAP as well as minimize the market impact into achieving that price, thus minimizing the total cost of the trade 2. Duration Limits 3. Volume % Limits 25
VWAP
Number of Shares Percent of Order 120% 100% 20 15 80% 60% 10 5 40% 20% 0 0% 9:30 10:0010:3011:0011:3012:0012:3013:0013:3014:0014:3015:0015:3016:00 TIME
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade/Trajectory Planning
TCA Execution Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation Parameters Available for TPOV Orders:
1. Price Limits 2. Duration Limits The BXS TPOV strategy is designed to participate with either the primary or composite volume at a user specified rate.
Order quantities are determined for individual time sub intervals and scheduled for execution according to continuously updated forecasts of volume 120
Target Percent of Volume
Market Shares Order Shares 100 40 20 80 60 0 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30 16:00 TIME
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade/Trajectory Planning
TCA Execution Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation Parameters Available for Arrival Price Orders:
1. Urgency Level 2. Price Limits The BXS Arrival Price strategy is designed to minimize execution shortfall to the midpoint of the initial bid/ask.
The trader determines a level of execution “urgency”- get done, high, medium, or low- which corresponds with the expected level of information content (alpha) embedded in the order.
The BXS system determines an initial optimized trading trajectory that controls the pace of execution, balancing market impact with market risk (time) based upon the level of urgency.
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.
3. Duration Limits 4. Volume % Limits
Arrival Price: Low Urgency
18 16 14 12 Number of Shares Percent of Order 120% 100% 80% 10 8 6 60% 40% 4 20% 2 0 0% 9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30 16:00 TIME
Arrival Price: High Urgency
100 90 80 70 60 Number of Shares Percent of Order 120 100 80 50 40 30 60 40 20 20 10 0 0 9:30 10:0010:3011:0011:3012:0012:3013:0013:3014:0014:3015:0015:3016:00 TIME
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade Lifecycle
EQUITIES
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FUTURES
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Crossing vs. Liquidity Pool
70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
BUY
Arrival Price Medium Buy 150,000 XYZ
70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
SELL
Target 20% of Volume Sell 135,000 XYZ
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Crossing vs. Liquidity Pool
BUY
Arrival Price Medium Buy 150,000 XYZ
“I Would” – Public or Dark
120,000 50,000 100,000 40,000 80,000 30,000 60,000 20,000 40,000 120,000 50,000 100,000 40,000 80,000 30,000 60,000 20,000 40,000
SELL
Target 20% of Volume Sell 135,000 XYZ
“I Would” – Public or Dark
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade Lifecycle
EQUITIES
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FUTURES
Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Limit Order Program
TCA Execution From Liquidity Pool XYZ Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning 5,000 Shares Net Sell T B – T C
Orders into Marketplace
Size 500 1000 300 100 700 1500
Bid 93.38
500
PX 93.38
93.37
93.35
93.31
93.27
93.25
Last 93.39
Size 300 400 200 500 1000 700
Offer 93.40
300
PX 93.40
93.41
93.44
93.47
93.48
93.52
Benchmark Determination Execution Evaluation
• Residual Orders are sent to the Limit Order Program • Trades are broken down into market size increments • Multiple limit orders are then placed into the market to create a “portfolio” of orders • Limit Orders are dynamically managed based upon executions and changes in market conditions • Limit order sizes, pricing, duration and spacing between orders change continuously to minimize information leakage and “footprint”
Limit Order Program 5,000 Shares Sell
Executions and Market Data
Size 100 500 1000 300 200 100 Size 1000 100 300 100 1000 700
Bid 93.39
100 Bid 93.37
1000
PX 93.39
93.38
93.37
93.35
93.34
93.31
PX 93.37
93.36
93.35
93.31
93.30
93.27
XYZ Last 93.41
XYZ Last 93.38
Size 100 200 300 600 1000 900 Size 600 100 500 200 600 300 • Major factors affecting orders are volatility, spread and liquidity
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
Offer 93.42
200 Offer 93.38
600
PX 93.42
93.44
93.45
93.46
93.48
93.51
PX 93.38
93.39
93.41
93.44
93.45
93.47
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Trade Lifecycle
EQUITIES
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FUTURES
Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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NSX / CINN ISE Stock Exchange CBOE BeX BATS EDGX / EDGA TRAC / DATA ONTD CHX BTRD PHLX Pipeline AMEX POSIT NASDAQ INET NYSE Arca NYSE LEH LCX CITI ACE SMART ORDER ROUTING TECHNOLOGY SORT UBS PINS Fidelity Cross Stream CS Cross Finder GS Sigma X MS Trajectory Crossing Morgan Stanley POOL LeveL Liquidnet NYFIX Millennium BIDS NASDAQ Crossing Network Matchpoint Instinet (CBX, etc.) ITG Now ISE Midpoint Match ITG Block Alert
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Smart Order Routing Technology — SORT
TCA Execution Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation
• SORT is the vehicle through which BXS executes limit orders in the marketplace.
• SORT creates a consolidated order book from all available liquidity pools.
• After the Limit Order Program determines the size and price of an individual order, SORT determines which liquidity pool(s) the order should be placed in.
• SORT will slice orders to access multiple liquidity pools simultaneously.
• Major factors influencing the choice of destination include current and historical price, liquidity and speed.
• SORT is utilized for NASDAQ as well as Listed stocks orders.
• Additional Smart Order Routers include SORTETF for Exchange Traded Funds and OSORT for listed equity options.
NYSE BTRD INCA ISLD Bid 93.38
500 Limit Order Program SORT Consolidated Order Book Last 93.39
ARCA Offer 93.40
300 BRUT AMEX SUPER MONTAGE
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
ITS/ CAES
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Trade Lifecycle
EQUITIES FUTURES
Execution Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation Execution Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Trade Lifecycle
EQUITIES
TCA Execution Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation
FUTURES
TCA Execution Sort Limit Order Prog.
Crossing vs.
Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Post Trade (Performance by Desk or Trader)
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Development of Algorithms for Futures: The 80/20 Rule
20 %
Expiration Economic News/Events Cash Market Events Accelerate the Development of Predictive Models for Futures Using Existing Models
80 %
Extension of the Equity Model Foundation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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What’s Next
Cross Asset Correlation Control Behavior
BLACK BOX
Act like a sales trader
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to important information and qualifications at the end of this material.
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Algorithmic Trading Equity Trading vs. Futures Trading
Morgan Stanley Institutional Securities
This material has been prepared for information purposes to support the promotion or marketing of the transaction or matters addressed herein. It is not a solicitation of any offer to buy or sell any security, commodity or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Morgan Stanley research department. It was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Past performance is not necessarily a guide to future performance. Please see additional important information and qualifications at the end of this material.