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September 2, 2013

Upgraded Algo Goes Real-Time

Investment Technology Group revamps an implementation shortfall algorithm so that it slows down or speeds up as market conditions warrant

By John D'Antona Jr.

ITG has recently introduced more real-time functionality into its implementation shortfall algorithm designed for buysiders who trade portfolios.

The latest version of the software, Dynamic Implementation Shortfall Algorithm 2.0 or DIS 2.0, adjusts its execution strategy in real-time as the market changes.


That means, in effect, it slows or speeds up its trading as needed. The ability to change speeds automatically allows the algo to more effectively manage risk while executing trades, Jeff Bacidore, ITG's head of algorithmic trading, told Traders Magazine.

"This version has new built-in features; it is designed for a trader to load up a list and hit 'go' and get an intuitive outcome," Bacidore said.

Keeping track of the many securities in a portfolio, or program, trade and their behavior during the trading day is extremely difficult. A list can have upward of hundreds of stocks. Tracking these individual stocks can demand a buyside trader's attention the entire day, without him ever getting a trade done. This holds especially true when the portfolio is being readjusted as part of a rebalance or a change in the index that a portfolio is tracking.

See Chart: Balance Between Risk and Cost

DIS was created to execute portfolio trades in a coordinated, automated, cost-effective manner. Bacidore said the latest iteration offers users a better way to trade the portfolio in the most cost- and risk-effective manner.

The new version incorporates both intraday trade and price quote information. The old version did not. This enhancement allows the revamped algorithm to better balance cost and risk when formulating its trading strategy and automatically update the speed of execution when trading.

In the algo's first iteration, DIS required the buyside trader to input more information, such as cash constraints, or how much cash a portfolio is willing to hold at a given time.

Also, in the old version, a user had to input some number indicating how fast the algo needed work out any trade imbalances (when the buy orders and sell orders are not equal) on a list, before it would calculate how to trade. The newer version doesn't need all of this data to be entered manually by the trader.

"The algo is meant to be aware of market conditions and the individual stocks in the list," Bacidore said. "For example, the algo is programmed to behave differently depending on the market environment. It will trade a given list much differently at 9:30 a.m. than it will at noon. It will also trade a chunkier, imbalanced list much differently than a liquid, balanced list."

Implementation shortfall algorithms try to minimize slippage in stock prices. That means they are programmed to ensure that the price at which a trade gets done is as close as possible to the price when the trader made the decision to trade the stock.


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