ALGO UPDATE: Pragma Enhances Pairs and Block Trading

The algorithm creation business has turned from a revolutionary business to an evolving one as buy- and sell-side needs are changing at a more granular level.

And for Pragma Securities, a multi-asset technology firm, this means building on its existing technology – the Pragma360 Suite of algorithms – and making them incrementally better, more efficient and bespoke to meet the evolving needs of the sell-side, and by default, the buy-side. The firm has recently unveiled new block trading and pairs capabilities for the Pragma360 Suite for equities, namely the Pairs 2.0 algorithm and the release of conditional order inclusion and functionality in its algos.

According to David Mechner, CEO of Pragma Securities, as traders require more flexibility in sourcing liquidity in todays ultra-complex market structure, the need for advanced and customizable algos is clear.

The incorporation of conditional orders into the platform helps traders combat the challenge they (traders) face with thin quoted markets and small average trade sizes in most US trading venues, Mechner said. And similarly, Pairs 2.0 incorporates a host of improvements to provide our customers with a really robust and flexible tool.

First up is Pairs 2.0. Curtis Pfeiffer, Chief Business Officer, told Traders Magazine in an interview that Pairs 2.0 is a wholesale rewrite of the Pragma360 pairs algorithm, providing increased control over pairs trades, through trade scheduling and rate controls, and more advanced order types.

Pairs trading has gained steady momentum since 2011, when stocks within the market became more correlated. That is, stocks began to move more in tandem with one another, and many firms look to help the buy-side trade more than one stock (i.e. a pair) at a given time. Also, Pairs and other arbitrage strategies profit from small pricing discrepancies–they involve buying one instrument and selling another correlated security. As the buy-side struggles to increase its alpha and capture more micro alpha, the need and popularity of pairs trading becomes even more clear.

2.0 is a complete upgrade and update of our existing pairs algo, began Pfeiffer. As M&A activity has been more robust, the sell-side has been using more of these types of algos and looking for ways to trade pairs. What weve done is given them greater control – allowing traders to set how the algo places orders in the market, how fast the orders get distributed or the maximum volume to participate.

The more choices and functionality, the easier it is for the buy-side trader to trade. And for Pragmas sell side clientele, better ways to serve the buy-side and stay relevant.

The first iteration of Pairs allowed for just two stocks to be traded in tandem and the buy-sde trader simply input his cash constraint. While this sufficed back in 2012, traders now are demanding more granular control and operational transparency, Pfeiffer added.

Weve also made other functional changes to our trade support tools – modifying the whole Pragm360 platform, including Panorama, our real-time algo management system, trade reports and our TCA component, to ensure Pairs 2.0 works, Pfeiffer said. Again, this allows our broker clients to better customize the algo and incorporate the functionality that their buy-side clientwants to leverage.

Trading Conditionally

The other new development in Pragma360 is the inclusion of conditional orders into the algorithms. Simply put, a conditional order is one that will be submitted or canceled if set criteria are met, which are defined by the trader entering the order.

As Pragma sees it, conditional orders are becoming increasingly popular to source large blocks of stock off board or in dark pools. By including conditional order functionality into the Pragma360 Suite, Pfeiffer said that buy-side traders would gain more flexibility in their trading strategies and not miss block trading opportunities as they appear.

So how does it work?

The conditional order operates by sending out multiple order indications, with pre-set parameters to several dark pools at the same time. If there are counterparty orders within the pool that match these parameters, the algorithm knows to send a firm order to the specific pool and cancels the other outstanding conditional orders. This facilitates a smoother and more efficient trade execution process for block trading.

Previously our algos only sent out firm orders, Pfeiffer said. But the conditional order is akin to sending out an indication of interest and allows the trader to control the minimum fill size. If two conditional orders agree, an automated execution will occur. There is no manual interaction, less slippage and leakage.

Furthermore, the conditional order type prevents any over-execution while maintaining the traders goal – get a block trade done.

Our clients are already trading in the dark, but now weve given them another way to access dark liquidity more efficiently, Pfeiffer said. Conditional orders provide a much more thoughtful and automated process for sourcing liquidity and reducing market impact.