Clare Piper of ConvergEx Group explains how algorithmic trading can give transition managers an edge
Abraxas; A tactical algo that dynamically balances orders among the most desirable market venues to efficiently access numerous sources of displayed and dark liquidity with minimal information leakage. A comprehensive sensitivity profile simultaneously measures five essential market signals for each order:
• Price: As prices become favourable, execute more;
• Timing Risk: As volatility increases, become progressively more aggressive;
• Spread: The wider the spread becomes, the more passively the order should participate;
• Tick: As the stock price is printing, become more passive or aggressive as needed;
• Momentum: If there is a strong trend in the stock price, become more aggressive.
Abraxas is incorporated into our wider implementation plan to ensure illiquid stocks receive particular attention.
Minimising Implementation Shortfall (IS)
Often the overriding goal is to minimise IS. The challenge is: The longer you take to trade, the larger your risk vs. your benchmark. However, trading too quickly can cause significant market impact.
Managing this trade-off effectively is a key skill. TMs use various optimisers (such as BARRA) to address this issue. We have gone a step further and created TOPxSM.
TOPx; Algo specifically designed to address trade-off between risk and market impact. Using IS as the benchmark, TOPx:
• Dynamically identifies optimal trading rates in real-time as market conditions evolve, while monitoring cash constraints and other opportunity costs in the context of the transition;
• Continually forms the trade list that minimises the sum of market impact and risk (MIN I + R), where ‘I’ is price movement resulting from demanding liquidity and ‘R’ represents adverse pricing action due to timing risk;
• Estimates market impact on the individual stock level using forward modelling methodology; effectively minimising market impact and portfolio risk at a selected level of risk aversion and adjusting to the trading rate over time;
• Decomposing risk into each stock’s marginal contribution, TOPx determines which names should be traded quickly and which provide a natural hedge.
These are just two examples of how technology assists the team at ConvergEx to better manage transitions – making technology work for you!
Note: Use of algos does not guarantee particular results, but they are an important tool in today’s trading environment.
Clare Piper is senior vice president, product management and sales – ConvergEx Group Global Transition Management
Contact her at:160 Queen Victoria Street, London EC4V 4LA
T: +44 (0) 20 7163 3297
[email protected]
