Transcript Management 188 Introduction to Management Information Systems

http://www.evergreen.loyola.edu/~pptallon/is356.htm
IS 356
IT for Financial Services
Algorithmic Trading
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.
Why should you care?
 Algorithms
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 If
–
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They are the future of securities trading
you want to work for a buy-side firm…
Expect to find algorithms in your toolbox
Have you heard about quant funds?
 Not
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all algorithms are the same
Some are little better than a coin-toss
Others will rock your socks off
 Got
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are dominating the market
math and statistics?
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TED – Ideas Worth Spreading
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Information Processing Time Falls
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Job Postings
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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
Source: Morgan Stanley
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Is the current trading model broken?
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Why use algorithms?
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Types of algorithms…
Source: Tabb Group
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Algorithm selection criteria
cost
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Algorithm Challenges
 Not
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great with illiquid stocks
If volume is low on a typical day, there’s not
much point in adopting an algorithm
 Algorithms
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do not react well to news releases
Humans are still needed to interpret releases
 Commoditization
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is a reality
Seen one, seen ‘em all (not quite yet)
 The
return of volatility calls for quality algos
Source: Adam Sussman, Tabb Group
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Trade lifecycle
TCA
Execution
Sort
Limit Order Prog.
Crossing vs.
Liquidity Pool
Trade/Trajectory Planning
Benchmark Determination
Execution Evaluation
Source: Morgan Stanley
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Benchmark Determination
Order(s)
Trade Structure
Development
More Structured
Schedule Based
 VWAP
Less Structured
Flexible
 Volume Participation
 TWAP
Dynamic
 Arrival Price
 Price React
Source: Morgan Stanley
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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.
Volume Weighted Average Price
Parameters
Available for VWAP
are:
1. Price Limits
2. Duration Limits
3. Volume % Limits
Source: Morgan Stanley
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Trade/Trajectory Planning
Order quantities are determined
for individual time sub intervals
and scheduled for execution
according to continuously updated
forecasts of volume
Target Percent of Volume
Parameters
Available for TPOV
Orders:
1. Price Limits
2. Duration Limits
Source: Morgan Stanley
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Trade/Trajectory Planning
The trader decides a level of execution urgencyget 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
Parameters
Available for Arrival
Price Orders:
1. Urgency Level
2. Price Limits
3. Duration Limits
4. Volume % Limits
Source: Morgan Stanley
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NSX /
CINN
ISE Stock
Exchange
CBOE
BeX
BATS
EDGX /
EDGA
TRAC /
DATA
ONTD
CHX
BTRD
PHLX
Pipeline
AMEX
NASDAQ
INET
POSIT
NYSE
Arca
SMART ORDER
ROUTING TECHNOLOGY
Liquidnet
SORT
NYFIX
Millennium
NYSE
LEH
LCX
BIDS
NASDAQ
Crossing
Network
CITI
ACE
UBS
PINS
Matchpoint
Fidelity
Cross
Stream
CS
Cross
Finder
GS
Sigma
X
MS
Trajectory
Crossing
Morgan
Stanley
POOL
LeveL
Instinet
(CBX,
etc.)
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ITG Now
ISE
Midpoint
Match
ITG Block
Alert
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Source: Morgan Stanley
Post Trade Analysis
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http://www.thetrade.ltd.uk/ALGO_PART_1.pdf
Insights…
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http://www.pdf-search-engine.com/algorithmic-trading-pdf.html
For more information…
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For Next Class…

Read
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The second blog is due on October 9
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First case write-up is due at the start of class on October 2
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Midterm on October 16
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