ALGO UPDATE: BofA Merrill Unveils New Algos, Option Data Feeds for Options on Instinct

Buy- and sellside traders who execute options orders on Bank of America Merrill Lynchs Trader Instinct trading system are getting a slew of improvements and new tools.

Buy- and sellside traders who execute options orders on Bank of America Merrill Lynchs Trader Instinct trading system are getting a slew of improvements and new tools.

The bulge broker, in a bid to grab more options trading volume as that sector experiences solid growth, has revamped its Instinct Options electronic trading system. The firm is looking to help traders maximize their order-handling efficiency and get better fill rates.

According to Meaghan Dugan, head of electronic options product, the new enhancements to the Instinct Options component of the platform include an infrastructure upgrade, a range of new algorithms including a TWAP (Time Weighted Average Price) algo, and direct option market data feeds for more efficient, finely tuned processing in the router.

Other enrichments to the Instinct Options platform include:

Advanced market data processing.

Display quantity randomization.

Delta-adjusted performance improvements.

Exchange crossing order mechanisms such as price improvement, facilitation, solicitation and customer match.

According to BofA Merrill, Instinct Options draws on in-depth market insights and actionable ideas, adaptive algorithm strategies, vast liquidity capture and global reach, with flexible delivery through both electronic and consultative channels to help clients efficiently engage in options trading through a single platform.

We wanted to incorporate high-touch insight into our electronic trading channels and give clients access to all of our trading tools, Dugan told Traders. We want to be a leading options platform in all aspects — performance, technology and service.

According to a BofA Merrill analysis, its Instinct Options algorithms boast an aggressive capture rate of 98 percent to 99 percent.

Dugan added that the options component of Instinct was due for some technology enhancements as the market continues to evolve thanks to technological changes, latency requirements of traders and fragmentation.

The options TWAP algorithm is brand new to Instinct, Dugan told Traders. The electronic tool was first deployed last August at a clients request. The algo is based on a long trading horizon and is geared to minimize trading impact. It executes orders in similar slices in a specified time interval.

This TWAP starts passive and becomes more active and dynamic before crossing the spread at the end of the tranche to achieve the traders limit, Dugan explained. Also, due to the nature of the U.S. options market structure, there is no historic 21-day curve to build into its logic. Therefore, we used a methodology that looks at the current market, including NBBO size, and dynamically balances the order quantity over a period of time.

While the TWAP algo was originally designed for and aimed at the buyside, BofA Merrill is now allowing sellside users to tap into this technology as well.

BofA Merrill offers two primary single-leg algorithms. The first is an adaptive type, and the second is liquidity-seeking. Adaptive algos include the aforementioned TWAP algo as well as a Delta Adjusted algo. The firm has also incorporated smart spread order-routing technology into its electronic trading tools. The firm has a total of five algorithms for options.

For the existing options algos, the firm has added randomization logic to help prevent or minimize information leakage on passive orders. The algos now wont always dice up a parent order into similar-size child lots, but will work within a predefined range. Also, order sizes will be different in the child orders, again sized within a user-defined band that the broker helps tailor to the buyside traders needs.

One last improvement for the options suite is the use of direct-market data feeds in the order router. This was needed as options market fragmentation has accelerated in the last few years.

We have 14 options exchanges now, and it takes a lot to hook up to them and get the data points connected into our router, Dugan said. By using direct feeds, we can now fine-tune our router for child order placement.