Look out high-frequency traders, there’s a new algorithm out designed to filter out trading strategies that could front-run or game buyside traders’ orders.
In what is a becoming almost cliche in the equities market, stopping high-frequency traders from sniffing out the buyside trader’s orders is more important than ever. It is to this end that ITG’s newest algorithm, ITG Smart Limit Algorithm or “SLimit,” is designed. And to help the buyside find that elusive block trade that helps them achieve their alpha goals more quickly and quietly.
How does it work?
SLimit works by employing intelligent passive trading strategies, according to Jeff Bacidore, head of algorithmic trading at ITG. It employs sophisticated logic to determine optimal order pricing, sizing and routing in order to balance spread capture opportunities and adverse selection risk. The goal is to help the buyside find liquidity and outwit high-frequency traders and electronic market makers.
In a sense Slimit is an “algo’s algo” that can work on top of ITG’s other algorithms to help locate liquidity passively instead of blasting marketable orders to myriad trading venues, Bacidore added. SLimit can be used as a standalone algorithm too.
In a unique twist, by using SLimit the buyside trader earns or receives the spread in a trade as opposed to paying it to someone else.
“When the buysider works a large order, SLimit works it passively, not using market orders,” Bacidore said. It uses market maker-type techniques to work an order. “SLimit enables institutional traders to compete effectively with high frequency traders when supplying liquidity since it uses similar trading technology and techniques. And it can be used when working orders manually or indirectly when using an existing ITG algorithm,” he added.
Bacidore told Traders that the anti-HFT logic SLimit uses is a brand new approach whereas the algorithm acts much like an electronic market maker. The technology, he added, is brand new and took two years to build, in order to fully research how the algo should operate and achieve super low-latency.
The designers of the algo have had exposure to electronic market making and high-frequency strategies, said Bacidore.
“If we’re going to compete with these guys and earn spread, we need to have similar or better techniques than they do,” Bacidore said, referring to high-frequency traders and market makers. “People on the buyside have experience trading algorithmically. Slimit gives them the ability to employ HFT-like trading strategies when using algo but without becoming high frequency traders themselves.”
SLimit has been in production for almost a year now, after beta testing with several of ITG’s other algorithms, one at a time, to ensure proper function. Testing began with volume-weighted average price algorithms, which Bacidore said was a well-defined trading strategy with a volume curve that could be tracked, to evaluate its performance. Now it has been rolled out and cleared for use with each of the agency-only broker’s algorithms. It can be customized for each algorithm and per a customer’s needs.
“The vast majority of our clients use it indirectly, via VWAP or implementation shortfall algorithms for example,” he said.
SLimit can be used via its Triton execution management system of via FIX connection from third party vendors. It can also be used on behalf of clients via ITG’s high-touch portfolio trading desk.
