Robert Schuessler
Traders Magazine Online News

A Smarter Monkey

In this contributed piece, TIM noted that some traders do better than others when using data that has been run through certain analysis - that is, have used some form of machine learning to assist them.

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July 1, 2010

New BofA Merrill Algos Pair Up

By John D'Antona Jr.

Buyside traders can now use Bank of America Merrill Lynch pairs-trading algorithms for equities. Pairs algos are often used to buy one security and sell another correlated security in a single trade, to take advantage of small price discrepancies.

The algos permit traders to set different levels of aggressiveness or passivity into the existing four strategies: Spread, Ratio, Inverse Spread and Inverse Ratio. This lets the buyside incorporate their market knowledge and experience into a trade, said Dan Nachtman, product manager and director of execution services at BofA Merrill.

"Pairs algos are a more straightforward way of clients taking on a position and then later unwinding it," Nachtman said.

A fifth pairs strategy, called "Outperformance," is being readied for release to the buyside as Traders Magazine goes to press. According to Lee Morakis, head of sales at BofA Merrill, this new algo trades when one selected asset outperforms another by a preset level.

For the past four months, the firm has been using the pairs-trading algos for its capital-commitment trades, Nachtman said. But as the buyside has increased its statistical arbitrage trading recently, he said, it makes sense to offer pairs to institutional accounts.

A handful of major brokers have developed algorithms that let traders quickly lock in prices in order to hedge positions or conduct arbitrage trades across markets.


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