You are on page 1of 33

Comparing Algorithmic Trading Advances in Canada and Globally

Toronto Hilton May 5 6, 2008

Session Participants
Steve Mariotti Chief Technology Officer, Mapleridge Capital Corp.

Alison Crosthwait Head of Research, ITG Canada Abraham Kohen Director Trading Strategies, FlexTrade Systems Inc. Lou Mouaket Eugene Choe Vice President, Portfolio Trading, TD Newcrest Director, Credit Suisse

Algorithms: The Journey is as Important as the Destination


Alison Crosthwait Head of Research, ITG Canada

2008 World Submarine Racing Championships

What you cant see is important


Is your Algorithm accessing the following sources of liquidity?
Interlisted Liquidity Alternative Trading Systems DARK (including interlisted DARK liquidity)

Connectivity: Alternative Trading Systems


Canadian Names ITG Canada offers connectivity in Canadian equities to:
TSX PURE Omega (expected Q3 2008) Chi-X (expected Q2 2008) Alpha (expected ready for launch) MatchNowSM Blockbook US light and dark liquidity (for interlisted names)

All Canadian orders to the TSX are routed through our Smart Router (SMRTCAN) which checks the ATS Exchanges and MatchNow for liquidity before posting on the TSX. SMRTCAN ensures access to all Canadian market centres and thus access to liquidity and price improvement opportunities.
MatchNowSM is a product offering of TriAct Canada Marketplace LP (TriAct) and indirectly owned by ITG Canada Corp. TriAct is registered as an Investment Dealer and Alternative Trading System in the provinces of Ontario and Alberta, and exempt from registration as a dealer in the Provinces of BC, SK, MN, QC, NS and NFLD & Labrador. Further information regarding TriAct is available on the website www.triactcanada.com.

Dark Connectivity

Why is connectivity important?


Connectivity to dark and interlisted liquidity results in a reduction of slippage versus VWAP. AN EXAMPLE:
You have a list containing TSX 60 names. The orders are a maximum of 5% of average daily volume. Your benchmark is VWAP and you must complete. What performance would you expect versus VWAP? Average bid-ask spread in the TSX60 is 8 bps. Strong VWAP algorithms are approximately 50% passive and 50% aggressive. Thus one would expect to miss VWAP by 4 bps. 40% of the volume of the TSX60 trades in the US. Assuming an average 2 basis point advantage when accessing better priced US liquidity this amounts to a performance bump of 40% x 2 bps = 0.8 bps. On average you will receive 12% of your fills from DARK. DARK fills generally save you half the spread. Accessing DARK liquidity will lead to a performance bump of 15% * 4 bps = 0.6 bps. Total performance bump from accessing interlisted and DARK liquidity = 1.4 bps. That is a 35% improvement over our original estimate of 4 bps.

Multi-asset Algorithmic Trading Canada and US


Abraham Kohen Director Trading Strategies, FlexTrade Systems Inc.

Trends
+ interest in other asset classes . Trade cheapest asset or richest asset + volumes, in derivatives, and underlying
A. hedging (delta and gamma, if long vol) B. portfolio margining C. options algorithms, ( equity algos) e.g., 1. Volatility trading 2. Dispersion trading 3. Delta adjusted limits D. Risk Arb via Options; E. Buy BSC garbage puts rather than Short Stock

Exchange consolidation & new exchanges + ECNs Desire for opaqueness (stealth) by traders Execute butterfly & underlying on 4 or more exchanges Algorithm trading unique to each asset class & unique to arbitrages across classes FX to facilitate cross-border arbitrage; FX as a pro trade
10

Canada
Liquidity: Exch/ATSs, Crossing Networks, and Dark Pools
TSX, Pure, Chi-X, Omega, Alpha Perimeter, Liquidnet TSX ATX, MATCH Now

Smart Order Routing Unique to Canadian market microstructure (icebergs, etc.) Portfolio Optimization Whose Volume? (VWAP, Vol Participation, etc.) TMX Group (TSX-ME approved) TSX warrants, debentures & equities already multi-asset 2009 TSX/ISE -> TMX/ISE ?? What about ME + BOX ??

11

Algo Trading Dos


Mix It Up:
Be Un-Predictable -> Randomize Hide your intentions. Dont telegraph ahead. Route multi-leg to multi-dest

Trader Add Value by choosing parameters or algos reflecting market or trend; Quants add value by Meta-level algo selection Use broker-neutral platform to route to reliable destinations Keep broker/destination statistics; reward good performance Use broker-neutral smart router Use adaptive dynamic algos. (Dynamic Delta)

12

State of Algo I
Equities
Brokers have algo suites which they each claim are the best. CS: guerilla, sniper; BofA: ambush, razor; GS: sonar Hedge Funds write their own proprietary tactics Broker-Neutral Vendors (Flextrade) give you tools to write tactics in C/C++ in a Formula Builder, and let you use libraries accessible by rules Broker-Neutral Vendors (Flextrade) provide API (C++/Java/.net) Broker-Neutral Vendors (Flextrade) offer out-of-box algos, broker algos, build your own.

Options
Phase I Brokers rehash equity algos as options algos TWAP, pathfinder, sniper, trigger Phase II Brokers announce options algos Volatility Pegged Trades 20 vol bid at 40 vol offer Delta adjusted limits Constant delta (0 gamma) over a range
13

State of Algo II
Options
Volatility pegged trades w/ Options Pricing Models built-in, using firms i-rates and div projections Delta-adjusted limits with dynamic delta (gamma, ATM near-expiry) Multi-legged trades algorithmically Spreads, Butterflies, Condors Dispersion Execution Short Vol : Auto Delta Hedging w/ User Defined Hedge Instrument Long Vol : Gamma Hedge (Buy Lo, Sell Hi) Staged Sweeper Liquidity Cleaner, sweeps exchanges multiple times allows excluding certain exchanges

Futures
Synthetic Order Types Iceberg Contingent Orders Multi-legged trades algorithmically.

Multi-Asset
Full integration with Options, Futures and FX from a single screen.
14

Next Generation Algorithms in Canada


A Focus on Improving and Changing Existing Strategies to Accommodate Multiple Market Places
Lou Mouaket Vice President, Portfolio Trading, TD Newcrest

Continuous Order Books in Canada


Comparing the Continous Markets in Canada
TSX Launch Date Website Address Reuters Info Page Stocks Traded Live www.tsx.com N/A (see website) ALL TSX, TSXV Live www.puretrading.ca PURETRADING ALL TSX OM Group Private Equity (Including UBS) Reuters/Bloomberg (<stock symbol> CJ <equity>) Pure Trading Live www.omegaats.com Omega Feb 20/08 www.chi-xcanada.com CHI-X Alpha Trading Systems Sept. 8/08 www.alphatradingsystems.ca N/A ALL TSX, TSXV Cinnober TD, BMO, CIBC, Dejardins, RBC BNS, NA, Canaccord, CPPIB All Vendors Individually

Technology Provided Internally Designed Ownership Publicly Traded, Widely Held TSX TSX Datalinx All Vendors Incumbent, market share substantial and rooted Published

N/A (see website) CHIXCANADA TSX/TSXV Names Interlisted in ALL TSX US Perimeter Financial, MarLar Internally Designed (Instinet) Group Perimeter Financial, MarLar Group, SwiftTrade Reuters (page-based) Instinet TSX Datalinx Reuters (page-based)

Trade Information

Unique Features Broker Numbers

First fully live competitor to TSX, very Second live ATS, fast engine quick messaging times on engine Published Make/Take Tiered Structure $0.0027/$0.0037 (<30MM shrs/mth) $0.0032/$0.0032 (>30MM shrs/mth) Subscription-based (Level 1/2), Connection-based (PBF) YES Richard Carleton richard.carleton@cnq.ca 416-572-2000 ext. 2326 Not Published (Anonymous) Make/Take No Tiers $0.0036/$0.0039 No Charge YES Greg King gking@omegaats.com 416-646-2764

Also offers order routing facility, Mature ATS experience, access investors represent significant order to global network flow Not Published (Anonymous) Make/Take No Tiers $0.0025/$0.0028 No Charge YES Published Make/Take TBA (Expected to be Inside TSX Top Tier) TBD YES

Make/Take Tiered Structure Trading Fee Structure $0.0027/$0.0037 (top tier) $0.0029/$0.0035 (mid tier) $0.0031/$0.0033 (low tier) Subscription-based (Level 1/2), Data Fee Structure Connection-based (TBF) Rebate Cheques to Net NO Liquidity Providers Contact Email Phone Thomas Kalafaitis thomas.kalafatis@tsx.com 416-947-4288

Beth Haines Tim Thurman elizabeth.haines@chi-xcanada.com tim.thurman@alphatradingsystems.ca 416-304-6375 647-259-0413

16

Dark Liquidity Pools In Canada


Comparing Dark Pools in Canada
TRI-ACT MATCHNOW Launch Date Website Address Reuters Info Page System Type Stocks Traded Ownership July 2007 www.triactcanada.com TRIACTPAGE ATS All TSX Subsidiary of ITG Canada Corp. ATX Q1 2008 (Hardware live July 2007) www.tsx.com N/A Facility of TSX All TSX, TSXV Owned by TSX Group Inc. August 2005 www.pfin.ca BLOCKBOOK ATS All TSX BLOCKBOOK LIQUIDNET October 2006 www.liquidnet.com LIQUIDNET ATS All TSX, TSXV

Owned by Perimeter Financial - closely held Principal investor is Seth Merrin, minority private company - partners include, CDP, holders are TVC, Summit, TH Lee OTPP, Goldman Sachs, CI Funds Distributed by TSX Datalinx and Reuters - Anonymous dark pool only accessible by buy-side - Not a separate electronic entity, system resides within buy-side OMS systems and 100% of client orders stay in system until completed, cancelled or re-routed

Trade Information

Distributed by TSX Datalinx (included in Distributed by TSX Datalinx, included in Distributed by TSX Datalinx, Reuters and TL1 and TBF), Bloomberg ("TR" market) TL1 and TBF BlockBook website - Passive intents match in a call market or participate with market-bound flow - Brokers have option of having all order - Anonymous, continuous, PRICE-time flow pass through ATX priority block market - If orders are not matched right away, signals will indicate that there are offsetting orders at nearby price points, some argue this is more of a "grey book"

Features/Description of Market Model

- Intents will be matched continuously - Intents will match against eachother at throughout the day (rather than 30 second intervals or trade with inbound intervals) with no order queuing and orders that sweep through en route to a broker matching function still applicable CLOB (same as TSX)

Price Improvement Mechanism

Passive intents that interact with active Intents that match eachother will split the intents or order flow will be matched at Prices can be negotiated at any price,sell- Prices can be negotiated at any price, buyNBBO spread 50/50, liquidity-providing the NBBO price plus an exchangeside members are limited by best price/best- side members are not limited by best intents that match against market-bound determined price improvement (price ex obligations, buy-side members are not price/best-ex obligations orders will receive 80% of the spread improvement specifics not yet available) Published (but Anonymous is available) Stock price > $5.00 $0.001/share/side (capped @ $10) Crosses = $0.01/share (capped @ $10) Stock price < $5.00 $0.005/share/side (capped @ $10) Crosses = $0.05/share (capped @ $10) Sell-side (Buy-side access via brokersponsored DMA) Published Tiered Active/Passive Structure See: www.tsx.com/en/pdf/notices/July272007_ATXFeeNotice-022.pdf Sell-side (Buy-side access via brokersponsored DMA) N/A (Community matching facility not yet live) $0.01/share $0.02/share Not Published Not Published (Buy-side Only)

Broker Numbers

Trading Fee Structure

Access Open To

Buy-side and Sell-side

Buy-side Only

How To Access System Available via FIX (Trading & Info) Average Daily Volume (Oct.1/07 - Feb.29/08) Average Daily Value (Oct.1/07 - Feb.29/08) Contact Email Phone $ Joanne Hill jhill@triactcanada.com 416-861-1010 ext. 261

Available via FIX (REDIPlus, ITG Triton, Available via Liquidnet Desktop Network Neovest, TradingScreen, Bloomberg EMS) Application (OMS Integrated) 57,201 $ Chris Jackson chris.jackson@pfin.ca 416-703-7800 ext. 400 1,516,983.65 $ Robert Young ryoung@liquidnet.com 646-674-2128 505,529 14,408,783.24

690,678 N/A 17,300,352 N/A Thomas Kalafatis thomas.kalafatis@tsx.com 416-947-4288

17

US Darkpools and Algos


Types of Dark Pools
Type Independent/Agency Owned Broker/Dealer Internalization Consortium-owned pools where many broker dealers are investing Exchange Crossing Networks Example Instinet, Liquidnet, POSIT Goldman Sachs Sigma X, Credit Suisses Cross Finger, UBSs PIN BIDs and LeveL NASDAQ Crossing Network

Dark Algos in the US


Broker Citi Credit Suisse Goldman Sachs JP Morgan Chase Morgan Stanley UBS Algorithms Dagger, Scouter Guerrilla, Sniper Sonar Aqua, Arid Night Vision UBS Tap

18

Supervising Algorithms in Canada


RS has released a notice specific to algos and their supervision under UMIR. A participant has the same supervisory requirements as an ordered entered using the keyboard of a desk trader. Checks need to be in place for a trader fat finger as well as a computer fat finger. Example: an unexpectedly looping algorithm. Dilemma disconnect between the programmer of the Algorithm and the trader that uses it. Brokers test drive their algos before rolling them out DSA.

19

Algos of the Future in Canada


Multiple marketplaces Genetic Algorithms guesses are used to approximate optimal market conditions. Based off of performance, only parameters that result in good executions are allowed to live. Reinforcement Learning Models News Algorithms Algo of Algo model?

20

Advanced Execution Services (AES)


Eugene Choe Director, Credit Suisse

Canada: How Does Smart Order Routing Work?


Its one thing thing to have Its another to connectivity Smart Order Route!
Resident Darkbook Orders; Darkbook IOCs

Crossfinder+ Pathfinder
Interlisted

AES Crossfinder+ sources non-displayed liquidity on ATSs and Dark Pools.

AES Pathfinder sources displayed liquidity on all exchanges and ECNs.

Traditional Exchanges

ECNs

BorderCross

Price Improvement Range 4 mils 3.5c

Avg. Price Improvement 95 mils (4bps)

% of Shares Executed in US 27.15%

22

Introduction
Electronic Trading as % of Total US Volume
80% 70% 60% 50% 40% 30% 20% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007E Algo DMA

AES Americas daily volume (Feb '02 - Jan '08)

Source: Tower Group Estimates

500,000,000 450,000,000 400,000,000 350,000,000 300,000,000 250,000,000 200,000,000 150,000,000 100,000,000 50,000,000 Fe bM 02 ay A 02 ug -0 N 2 ov -0 Fe 2 bM 03 ay A 03 ug -0 N 3 ov -0 Fe 3 bM 04 ay A 04 ug -0 N 4 ov -0 Fe 4 bM 05 ay A 05 ug -0 N 5 ov -0 Fe 5 b0 M 6 ay -0 A 6 ug -0 N 6 ov -0 Fe 6 bM 07 ay -0 A 7 ug -0 N 7 ov -0 7

NYSE Hybrid rolled out

23

Europe: A Post MIFID Model Emerges


Some things look surprisingly like before
Median Exchange Spreads (Bips)
Ireland Czech Greece Poland South Africa Portugal Sw eden Norw ay Denmark Austria Finland Spain Belgium UK Sw itzerland Netherlands Italy France Germany US Average

Median Exchange Latencies (ms)


US A verage CHI-X LSE Ireland Germany Euro next Sweden Finland

27 26 26 25 24 18 18 17 15 12 12 11 10 8

40 36

55

87

118

5 7 20

US median: 5 ms
49 54 81 86 90 95 105 111 116 251 321 1083

Euro median: 90 ms

Euro median: 24 bips

VIRTX No rway A ustria Co penhagen

US median: 5 bips

M ilan SWX Spain

Speed of Change
Established exchanges are not particularly keen to respond to these changes. Market inefficiencies coupled with large
ticksizes dictate that many markets will continue to have large median spreads higher

Due to a lack of investment, latencies are


and will continue to be much higher than the competitive US market

Euro median spreads are nearly 5x

Euro median latencies are 18x higher.

24

Europe: The Market is getting CROWDED


Exchanges Members Only Pools Live MTFs Upcoming MTFs

Traders need connectivity AND SMART ORDER ROUTING!

25

Europe: A Post MIFID Model Emerges


Close to 20% of eligible volume is trading away
Approaching 20%
off exchange volume
25.00%

20.00%

15.00%

1) Crossing darkly AND 2) Pathfinding intelligently


10.00%

Pathfinder ~ 10% Crossfinder+ ~ 8.5%

5.00%

0.00% 1/2/2008

1/9/2008

1/16/2008

1/23/2008

1/30/2008

2/6/2008

2/13/2008

And this is only with 3 venues: Crossfinder, Chi-x light orders and Chi-X dark!

26

Asia-Pacific: The Changing Landscape of Trading


Crossing off market is a growing phenomenon.
New Venues

CrossFinder Results

Japan ~ 9% Hong Kong ~ 5% Singapore ~ 4% Korea ~ 3% Australia ~ 1%

And getting BIGGER!


Coming Soon

27

Asia-Pacific: Dark pools starting as broker crossing engines


Credit Suisse and Instinet link to form Japanese dark pool in May 2007 Dark pools like Liquidnet and NYFIX moving into Asia Crossfinder available in private mode
28

Foreign Exchange
Imagine one world, one smart router:

Trade cross-listed stocks seamlessly in multiple nations. AES trades the FX, delivers you a fill in the local currency. Trade Any Country, Settle Any Currency.
Smart routing hits Foreign Exchange:

5 new currency pairs added, bringing total to 21:


AUD/USD EUR/CHF EUR/DKK EUR/GBP AUD/JPY EUR/SEK EUR/USD GBP/USD NZD/USD CHF/JPY USD/CHF USD/HKD USD/JPY USD/SGD GBP/JPY EUR/JPY EUR/NOK USD/CAD USD/ZAR USD/MXN GBP/CHF

29

Futures
2007 Percentage of Electronic vs. Manual in Futures:
100%

25
80% 60% 40% 20% 0%

17

28 Electronic Manual

75

83

72

waving goodbye

CME

CBOT

NYMEX

Source: Tower Group analysis, CFTC, and Exchange reports

30

Options
US listed options volume (1973 2007)
3000000000

6 competing
exchanges:

2500000000

Decimalization
pilot launched last January

2000000000

1500000000 1000000000

Very similar to

equity markets circa 2002

500000000

0
73 79 83 91 95 01 75 85 93 97 99 03 05 77 81 87 89 19 19 19 19 19 19 19 19 19 20 19 19 19 19 19 20 20 20 07

31

Questions?

32

Toronto Hilton May 5 6, 2008

You might also like