Comparing Algo Trading Advances in Canada & Globally_20080506

7/30/2019 Comparing Algo Trading Advances in Canada & Globally_20080506

1/33

Comparing Algorithmic Trading Advancesin Canada and Globally

Toronto Hilton

May 5 6, 2008


2/33

2

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 Vice President, Portfolio Trading,

TD Newcrest

Eugene Choe Director, Credit Suisse


3/33

Algorithms: The Journey is asImportant as the Destination

Alison Crosthwait

Head of Research, ITG Canada


4/33

4

2008 World Submarine Racing

Championships


5/33

5

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)


6/33

6

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 liquiditybefore posting on the TSX. SMRTCAN ensures access to all Canadianmarket centres and thus access to liquidity and price improvementopportunities.

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.


7/33

7

Dark Connectivity


8/33

8

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 basispoint advantage when accessing better priced US liquidity this amounts to aperformance bump of 40% x 2 bps = 0.8 bps.

On average you will receive 12% of your fills from DARK. DARK fills generallysave 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.


9/33

Multi-asset Algorithmic Trading

Canada and USAbraham Kohen

Director Trading Strategies, FlexTrade Systems Inc.


10/33

10

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 arbitragesacross classes

FX to facilitate cross-border arbitrage; FX as a pro trade


11/33

11

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 ??


12/33

12

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 reliabledestinations

Keep broker/destination statistics; reward good

performance

Use broker-neutral smart router

Use adaptive dynamic algos. (Dynamic Delta)


13/33

13

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 inC/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


14/33

14

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.


15/33

Next Generation Algorithms in Canada

A Focus on Improving and Changing Existing Strategies toAccommodate Multiple Market Places

Lou Mouaket

Vice President, Portfolio Trading, TD Newcrest


16/33

16

Continuous Order Books in Canada

Launch Date Live Live Live Feb 20/08 Sept. 8/08

Website Address www.tsx.com www.puretrading.ca www.omegaats.com www.chi-xcanada.com www.alphatradingsystems.ca

Reuters Info Page N/A (see website) PURETRADING N/A (see website) CHIXCANADA N/A

Publicly Traded, Private Equity TD, BMO, CIBC, Dejardins, RBC

Widely Held (Including UBS) BNS, NA, Canaccord, CPPIB

TSX TSX DatalinxTSX Datalinx Reuters (page-based)

All Vendors

Unique FeaturesIncumbent, market sharesubstantial and rooted

First fully live competitor to TSX, veryquick messaging times on engine Second live ATS, fast engine

Mature ATS experience, accessto global network

Also offers order routing facility,

investors represent significant orderflow

Broker Numbers Published Published Not Published (Anonymous) Not Published (Anonymous) Published

Make/Take Make/Take

Tiered Structure Tiered Structure Make/Take Make/Take Make/Take

$0.0027/$0.0037 (top tier) $0.0027/$0.0037 (30MM shrs/mth) $0.0036/$0.0039 $0.0025/$0.0028 (Expected to be Inside TSX Top Tier)

$0.0031/$0.0033 (low tier)

Data Fee Structure

Subscription-based (Level 1/2),

Connection-based (TBF)

Subscription-based (Level 1/2),

Connection-based (PBF) No Charge No Charge TBD

Contact Thomas Kalafaitis Richard Carleton Greg King Beth Haines Tim Thurman

Email [email protected] [email protected] [email protected] [email protected] [email protected]

Phone 416-947-4288 416-572-2000 ext. 2326 416-646-2764 416-304-6375 647-259-0413

CinnoberInternally Designed

ALL TSX, TSXV ALL TSX ALL TSX ALL TSX, TSXV

TSX Pure Trading Omega

Comparing the Continous Markets in Canada

CHI-X Alpha Trading Systems

NO YES YES YES YES

Reuters/Bloomberg( CJ )

All Vendors IndividuallyReuters (page-based)

Rebate Cheques to Net

Liquidity Providers

Trading Fee Structu re

Trade Information

Ownership

Technology Provided

Stocks Traded

Perimeter Financial, MarLar

Group, SwiftTradeInstinet

TSX/TSXV Names Interlisted in

US

OM GroupPerimeter Financial, MarLarGroup

Internally Designed (Instinet)


17/33


18/33

18

US Darkpools and Algos

NASDAQ Crossing NetworkExchange Crossing Networks

BIDs and LeveLConsortium-owned pools where many broker

dealers are investing

Goldman Sachs Sigma X, Credit Suisses Cross

Finger, UBSs PINBroker/Dealer Internalization

Instinet, Liquidnet, POSITIndependent/Agency Owned

ExampleType

Types of Dark Pools

UBS TapUBS

Night VisionMorgan Stanley

Aqua, AridJP Morgan Chase

SonarGoldman Sachs

Guerrilla, SniperCredit Suisse

Dagger, ScouterCiti

Algori thmsBroker

Dark Algos in the US


19/33

19

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 outDSA.


20/33

20

Algos of the Future in Canada

Multiple marketplaces

Genetic Algorithms guesses are used to

approximate optimalmarket conditions. Basedoff of performance, onlyparameters that result in

good executions areallowed to live.

Reinforcement LearningModels

News Algorithms

Algo of Algo model?


21/33

Advanced Execution Services (AES)

Eugene Choe

Director, Credit Suisse


22/33

22

Canada: How Does Smart Order

Routing Work?

TraditionalExchanges

ECNs

PathfinderAES Pathfindersources displayedliquidity on all exchanges and ECNs.

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

Resident Darkbook Orders;Darkbook IOCs

BorderCross

Interlisted

Its one thing to have

connectivity

Its another thing to

Smart Order Route!

27.15%95 mils (4bps)4 mils 3.5c

% of Shares Executed in USAvg. Price ImprovementPrice Improvement Range


23/33

23

Introduction

Electronic Trading as % o f Total US Volume

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2001 2002 2003 2004 2005 2006 2007E

Algo

DMA

Source: Tower Group Estimates

AES Americas dai ly volume (Feb '02 - Jan '08)

-

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

350,000,000

400,000,000

450,000,000

500,000,000

Feb-02

May

-02

Aug-02

Nov-02

Feb-03

May

-03

Aug-03

Nov-03

Feb-04

May

-04

Aug-04

Nov-04

Feb-05

May

-05

Aug-05

Nov-05

Feb-06

May

-06

Aug-06

Nov-06

Feb-07

May

-07

Aug-07

Nov-07

NYSE Hybridrolled out


24/33

24

Established exchanges are not particularly keen to respond to these changes.

Some things look surprisingly like before

Europe: A Post MIFID Model Emerges

Median Exchange Spreads (Bips) Median Exchange Latencies (ms)

Speed of Change

5

7

20

49

54

81

86

90

95

105

111

116

251

321 1083

US Average

CHI-X

LSE

Ireland

Germany

Euronext

Sweden

Finland

VIRTX

Norway

Aust ria

Copenhagen

M ilan

SWX

Spain

11887

5540

362726262524

181817

151212

11108

5

IrelandCzech

GreecePoland

South AfricaPortugalSwedenNorw ayDenmarkAustr ia

FinlandSpain

BelgiumUK

Sw itzerlandNetherlands

ItalyFrance

GermanyUS Average

Due to a lack of investment, latencies areand will continue to be much higher thanthe competitive US market

Euro median latencies are 18x higher.

Market inefficiencies coupled with largeticksizes dictate that many markets willcontinue to have large median spreads

Euro median spreads are nearly 5xhigher

US median: 5 bips

Euro median: 24 bips

US median: 5 ms

Euro median: 90 ms


25/33

25

Europe: The Market is getting

CROWDED

Exchanges Members Only Pools Live MTFs Upcoming MTFs

Traders need connectivityAND SMART ORDER

ROUTING!


26/33

26

Close to 20% of eligible volume is trading away

Europe: A Post MIFID Model Emerges

Approaching 20%off exchangevolume

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

1/2/2008 1/9/2008 1/16/2008 1/23/2008 1/30/2008 2/6/2008 2/13/2008

Pathfinder

Crossfinder+

1) Crossing darkly

AND

2) Pathfindingintelligently

~ 8.5%

~ 10%

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


27/33

27

Asia-Pacific: The Changing

Landscape of Trading

New Venues

Coming Soon

Crossing off market is a growing

phenomenon.

And getting BIGGER!CrossFinder Results

Japan ~ 9%

Hong Kong ~ 5%

Singapore ~ 4%

Korea ~ 3%

Australia ~ 1%


28/33

28

Asia-Pacific: Dark pools starting as

broker crossing enginesCredit Suisse and

Instinet link to

form Japanesedark pool in May

2007

Dark pools likeLiquidnet and

NYFIX moving into

Asia

Crossfinder

available in

private mode


29/33

29

Foreign Exchange

5 new currency pairs added, bringing total to 21:

AUD/USD EUR/SEK USD/CHF EUR/JPY

EUR/CHF EUR/USD USD/HKD EUR/NOK

EUR/DKK GBP/USD USD/JPY USD/CAD

EUR/GBP NZD/USD USD/SGD USD/ZAR

AUD/JPY CHF/JPY GBP/JPY USD/MXN GBP/CHF

Smart routing hits Foreign Exchange:

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.

Imagine one world, one smart router:


30/33

30

Futures

7583

72

2517

28

0%

20%

40%

60%

80%

100%

CME CBOT NYMEX

Electronic Manual

2007 Percentage of Electronic vs. Manual in

Futures:

Source: Tower Group analysis, CFTC, and Exchange reports

waving goodbye


31/33

31

Options

0

500000000

1000000000

1500000000

2000000000

2500000000

3000000000

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

US listed options volume (1973 2007) 6 competingexchanges:

Decimalizationpilot launchedlast January

Very similar toequity marketscirca 2002


32/33

32

Questions?


33/33

Toronto Hilton

May 5 6, 2008

Documents

Comparing Algo Trading Advances in Canada & Globally_20080506