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Algorithmic Trading . Equity Trading vs. Futures Trading. Morgan Stanley Institutional Securities.

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algorithmic trading

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.

what is an algorithm
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
trends behind algorithm trading
Trends Behind Algorithm Trading

EQUITIES

FUTURES

Regulatory Changes

Electronification of Markets

Improve Scale & Efficiency

Desire for Anonymity

Realization that Trading Is a Source of “Incremental Alpha”

Desire to Reduce Explicit and Implicit Trading Costs

impact of algorithms on traders
Impact of Algorithms on Traders

“Algorithms are productivity tools”

“Algorithms are just ONE of the tools available…”

trade lifecycle

TCA

Execution

Sort

Limit Order Prog.

Feedback Loop

Control

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Benchmark Determination

Execution Evaluation

Trade Lifecycle
trade lifecycle6

Execution Evaluation

Execution Evaluation

Trade Lifecycle

EQUITIES

FUTURES

execution evaluation

Volume

Significant Event

Time of Day

Price

Time

Time

Volatility

Size of Trade

Global Economic Events

Execution Evaluation

Spectrum of Difficulty

execution evaluation fit the algorithm to the strategy

Liquidity

Urgency

Trade Size

Execution Evaluation: Fit the Algorithm to the Strategy

Single Algorithms

Multiple Algorithms

Algorithm & DMA

Algorithm & Trader

Price Limits

Applicationof Constraints

Volume Limits

Time Limits

trade lifecycle9

Benchmark Determination

Benchmark Determination

Execution Evaluation

Execution Evaluation

Trade Lifecycle

EQUITIES

FUTURES

benchmark determination

More Structure

Less Structure

Benchmark Determination

Order(s)

Trade Structure Development

Examples

trade lifecycle11

Trade/Trajectory Planning

Trade/Trajectory Planning

Benchmark Determination

Benchmark Determination

Execution Evaluation

Execution Evaluation

Trade Lifecycle

EQUITIES

FUTURES

trade trajectory planning

TCA

Execution

Sort

Limit Order Prog.

Control

Feedback Loop

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Benchmark Determination

Parameters Available for VWAP are:

Execution Evaluation

1. Price Limits

2. Duration Limits

3. Volume % Limits

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 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

VWAP

trade trajectory planning13

TCA

Execution

Sort

Limit Order Prog.

Control

Feedback Loop

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Benchmark Determination

Parameters Available for TPOV Orders:

Execution Evaluation

1. Price Limits

2. Duration Limits

Trade/Trajectory Planning
  • 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

Target Percent of Volume

trade trajectory planning14

TCA

Execution

Sort

Limit Order Prog.

Control

Feedback Loop

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Benchmark Determination

Parameters Available for Arrival Price Orders:

Execution Evaluation

1. Urgency Level

2. Price Limits

3. Duration Limits

4. Volume % Limits

Trade/Trajectory Planning

Arrival Price: Low Urgency

  • 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.

Arrival Price: High Urgency

trade lifecycle15

Crossing vs.Liquidity Pool

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Trade/Trajectory Planning

Benchmark Determination

Benchmark Determination

Execution Evaluation

Execution Evaluation

Trade Lifecycle

EQUITIES

FUTURES

crossing vs liquidity pool
Crossing vs. Liquidity Pool

BUY

SELL

  • Arrival Price Medium
  • Buy 150,000 XYZ
  • Target 20% of Volume
  • Sell 135,000 XYZ
crossing vs liquidity pool17

70,000

70,000

60,000

60,000

50,000

50,000

40,000

40,000

30,000

30,000

20,000

20,000

10,000

10,000

0

0

15:00

15:10

15:20

15:30

15:40

15:50

15:20

15:30

15:40

15:50

14:00

14:10

14:20

14:00

14:10

14:20

14:30

14:40

14:50

15:00

15:10

14:30

14:40

14:50

Crossing vs. Liquidity Pool

BUY

SELL

  • Arrival Price Medium
  • Buy 150,000 XYZ
  • “I Would” – Public or Dark
  • Target 20% of Volume
  • Sell 135,000 XYZ
  • “I Would” – Public or Dark
trade lifecycle18

Limit Order Prog.

Limit Order Prog.

Crossing vs.Liquidity Pool

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Trade/Trajectory Planning

Benchmark Determination

Benchmark Determination

Execution Evaluation

Execution Evaluation

Trade Lifecycle

EQUITIES

FUTURES

limit order program

TCA

Execution

Sort

Limit Order Prog.

Control

Feedback Loop

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Benchmark Determination

Execution Evaluation

Limit Order Program

From Liquidity Pool

5,000 Shares

Net SellTB – TC

Orders

intoMarketplace

LimitOrder Program

  • 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”
  • Major factors affecting orders are volatility, spread and liquidity

5,000Shares Sell

Executions and Market Data

trade lifecycle20

Sort

Sort

Limit Order Prog.

Limit Order Prog.

Crossing vs.Liquidity Pool

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Trade/Trajectory Planning

Benchmark Determination

Benchmark Determination

Execution Evaluation

Execution Evaluation

Trade Lifecycle

EQUITIES

FUTURES

slide21

BeX

CBOE

BATS

ISE Stock

Exchange

EDGX /EDGA

TRAC /DATA

NSX /CINN

ONTD

CHX

BTRD

PHLX

Pipeline

AMEX

POSIT

NASDAQ

INET

Liquidnet

NYSEArca

NYFIX

Millennium

NYSE

BIDS

LEHLCX

NASDAQCrossingNetwork

CITIACE

Matchpoint

UBSPINS

ITG BlockAlert

FidelityCrossStream

ATS's

ISEMidpointMatch

CSCrossFinder

ITG Now

GSSigmaX

Instinet(CBX,

etc.)

MSTrajectoryCrossing

Broker Dealer

LeveL

MorganStanleyPOOL

ECNs

EXCHANGES

SMART ORDERROUTING TECHNOLOGY

SORT

ATS's

smart order routing technology sort

TCA

Execution

Sort

Limit Order Prog.

Control

Feedback Loop

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

BTRD

ITS/CAES

Benchmark Determination

Execution Evaluation

INCA

SUPERMONTAGE

ISLD

BRUT

Smart Order Routing Technology — SORT

LimitOrderProgram

  • 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.

SORT

NYSE

AMEX

Consolidated Order Book

XYZ

XYZ

Bid

Bid

Offer

Offer

93.38

93.38

Last

Last

93.40

93.40

500

500

93.39

93.39

300

300

Size

Size

PX

PX

Size

Size

PX

PX

500

500

93.38

93.38

300

300

93.40

93.40

1000

1000

93.37

93.37

500

500

93.41

93.41

300

300

93.35

93.35

200

200

93.44

93.44

100

100

93.31

93.31

400

400

93.47

93.47

700

700

93.27

93.27

1000

1000

93.48

93.48

1500

1500

93.25

93.25

700

700

93.52

93.52

ARCA

trade lifecycle23

Execution

Execution

Sort

Sort

Limit Order Prog.

Limit Order Prog.

Crossing vs.Liquidity Pool

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Trade/Trajectory Planning

Benchmark Determination

Benchmark Determination

Execution Evaluation

Execution Evaluation

Trade Lifecycle

EQUITIES

FUTURES

trade lifecycle24

TCA

TCA

Execution

Execution

Sort

Sort

Limit Order Prog.

Limit Order Prog.

Control

Control

Feedback Loop

Feedback Loop

Crossing vs.Liquidity Pool

Crossing vs.Liquidity Pool

Trade/Trajectory Planning

Trade/Trajectory Planning

Benchmark Determination

Benchmark Determination

Execution Evaluation

Execution Evaluation

Trade Lifecycle

EQUITIES

FUTURES

development of algorithms for futures the 80 20 rule

Expiration

Economic News/Events

Cash Market Events

Extension of the EquityModel Foundation

Development of Algorithms for Futures: The 80/20 Rule

20 %

Accelerate the Development of Predictive Models for Futures Using Existing Models

80 %

what s next
What’s Next

Cross AssetCorrelation

  • Control Behavior
  • Define your own algorithm
  • Act like a sales trader

BLACK BOX

algorithmic trading28

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.