VWAP and TWAP are fine for basic traders looking to execute orders electronically.
But for those more savvy traders, implementation shortfall (IS) are the way to go. And Horizon Software is looking to grab more of these sophisticated traders by building and offering its own IS strategy. As part of the IS rollout, the firm has also tweaked its existing strategies for optimum efficiency.
To hear Vincent Dumontoy, Global Head of Client Solutions and Services at Horizon explain it, the firm currently automates highly sophisticated trading strategies for the execution of large orders with the TWAP (Time-weighted average price), VWAP (Volume weighted average price) and POV (Percentage of Volume) algorithms that are currently available globally. These algorithms have been improved with the ability to automatically execute not only during the intra-day trading period but also during the opening and closing auctions to benefit from the most pricing opportunities.
The addition of the new IS algo looks to fill the void and aims at setting up two levels of spots and three levels of participation rate.
“The implementation of the new algo enables to adapt the participation rate to the spot evolution,” Dumontov said. “This new algo is even stronger with the choice to either define fixed levels of trading spots or follow the VWAP plus or minus a percentage along the execution.”
So, how does IS work exactly?
Implementation shortfall as the difference in return between a theoretical portfolio and the implemented portfolio. When deciding to buy or sell stocks during portfolio construction, a portfolio manager looks at the prevailing prices (decision prices). However, due to a number of factors, the execution prices may be different from the decision prices. This can result in returns that differ from the portfolio manager’s expectations – the shortfall.
Horizon’s strategy will increase the targeted participation rate when the stock price moves favorably and decrease it when the stock price moves adversely.
“We are delighted to offer these improved highly sophisticated algorithms and to see the array of benefits they will bring to our client base,” Dumontov said. “Apart from profit opportunities for the trader, algo-trading renders markets more liquid and trading more systematic. This new release of algorithms has been enriched so our clients can trade at the best possible prices with significant reduced human mistakes.”
Dumontoy added that the firm’s algorithms are offered on a single platform to embed custom algorithmic strategies and allow for maximum flexibility.
“We believe Horizon is uniquely positioned on the automated trading market by offering a very flexible algo framework that allows the traders to ‘trade their way’ or benefit from an advanced set of execution algorithms,” he said.
