Algorithmic and advanced orders in SaxoTrader Summary This document describes the algorithmic and advanced orders types functionality in the new Trade Ticket in SaxoTrader. This functionality allows the placement of the following algorithmic order types: Iceberg, VWAP, Reload, With Volume, Implementation Shortfall, Night Hawk and Smart Dark on Stocks and CFDs on a range of international exchanges. Also the US Pre-market Limit and IEX order types are available in the same user interface, although not strictly algorithmic orders. Orders are held for the day only and are routed to an external broker for execution. Initially execution is via Nomura and Instinet with more brokers potentially to be added at a later stage. Page 1 of 16
Contents Contents... 2 Introduction... 3 Availability per exchange, commissions and minimum Trade Sizes... 3 Overview: Algorithmic Orders in the SaxoTrader Trade Ticket... 4 Algorithmic Order: Iceberg... 5 Algorithmic Order: VWAP... 6 Algorithmic Order: With Volume... 8 Algorithmic Order: Reload... 10 Algorithmic Order: Implementation Shortfall (IS)... 12 Algorithmic Order: SmartDark / Nighthawk... 14 Algorithmic Order: OMX Nordic@Mid... 15 Advanced order (non algorithmic): US Premarket Limit (CFDs only)... 15 Advanced order (non algorithmic): IEX... 16 Page 2 of 16
Introduction Algorithmic orders allow traders to execute large orders on one or many exchanges (including dark pools) while minimizing market impact and following a benchmark strategy. Algorithmic orders offer a range of strategies that achieve this, each strategy having a different goal and set of specific parameters that the user needs to set. The SaxoTrader Trade Ticket has been developed to support an Algo tab which is visible for instruments where Algorithmic orders are supported. The Trade Ticket optimizes to show relevant options and settings based on the instrument that has been chosen, the strategy and the geographical location of the exchange. Availability per exchange, commissions and minimum Trade Sizes Page 3 of 16
Overview: Algorithmic Orders in the SaxoTrader Trade Ticket Tooltip provides guide to minimum quantity required Select Algorithmic order strategy Price NB! Can be placed (very) aggressively to ensure the order doesn t go passive. Strategy-specific settings and options Time Configuration for determining the period in which the order should be executed, including auction participation. Expandable information panel showing costs and other details Page 4 of 16
Algorithmic Order: Iceberg Description: Iceberg orders are sent only to the primary exchange where only the specified quantity of the total is shown at any given time. These are only supported for exchanges where this native order type is offered. Since the entire order is sent to the exchange it does not lose time priority (vs. Reload orders which lose time priority but participate on multiple venues). Available on European and US exchanges (not available on Asia Pacific exchanges.) European Exchange US Exchange Iceberg specific parameters: Display Quantity: The quantity of shares to be shown on the exchange at any given time. Page 5 of 16
Algorithmic Order: VWAP Description: Targets the volume-weighted average price over a specified time horizon. Price impact and information leakage are minimized using advanced execution techniques. The order is executed proportionally with expected market volume. Will aim to improve the all-in execution price by collecting the spread by joining the bid (or the offer for sell orders), but will generally keep in line with the historical volume profile for the period. If volume moves sharply away from usual profile, e.g. if news come out on a stock, it will likely result in higher deviation from VWAP benchmark. Note that the VWAP is not a guaranteed VWAP, i.e. it is not guaranteed it will match the market VWAP. As the VWAP is executed according to expected market volume the strategy should possibly not be preferred on days where the actual market volume is likely to differ significantly from the normal historic market volume, for example on days with earnings releases. Source: Nomura/Instinet Page 6 of 16
The VWAP strategy is available on European, US and Asian exchanges. European Exchange US Exchange Asia Pacific Exchange VWAP specific parameters: Volume limit % I Would price Execution style Auction Participation A cap on the percentage of actual traded volume that the order can represent. Offers protection that the order is not taking too big a share of actual market volumes. So - setting this above 50% does not really make sense, as being more than 50% of the volume in theory means you start trading with yourself. This is basically a price that you are happy with, so if you can get this price for the execution, you will take it. If specified, the strategy will try to complete the order at this price, so the I Would price will override the setting for maximum volume participation to trade as much as possible at this price. Only for European Exchanges: Lets the user decide the execution style of the order (Normal; Opportunistic or Strict). Opportunistic allows the strategy more flexibility in being ahead or behind the benchmark. Therefore the algo uses added-value or reduced-impact techniques at the cost of incurring more benchmark slippage. Strict tells the algorithm to stress minimizing benchmark dispersion, which means the algo will track the benchmark ahead of gaining performance. If not specified it will default to Normal, which will track the benchmark closely, while still trading opportunistically. Lets the user decide whether to participate in Open; Close; All or None of the Auctions. From automated close to auction close order will most likely remain partially filled will receive another partial fill during auction. (This is called Auction participation for European exchanges, and Exclude auctions for US/APAC exchanges the functionality is essentially the same). Dark block Only European and APAC exchanges. If ticked, the order may float order quantities Page 7 of 16
posting Dark block limit price Dark block access into dark pools. The use of this parameter may cause the order to deviate from core strategy behavior in the event of a cross, meaning the algo might deviate from a passive strategy and become aggressive in a dark pool if an opportunity to get filled inside the spread arises. Hence by default this is not ticked, i.e. does not allow floating to dark pools. A limit price for the Dark Block Posting. The Dark Block Limit Price could be considered to be set at a more aggressive price than the normal limit price due to the anonymity in the dark pool. Asia Pacific Exchanges only: OK to cross/no cross. This is related to dark pool crossing. If a client chooses OK to cross the order may float order quantities into dark pools which may cause the algo order to deviate from the core strategy in the event of a cross. Algorithmic Order: With Volume Description: The With Volume strategy trades in proportion with actual market volume (and not the ADV, Average Daily Volume, which is targeted by the VWAP order type) targeting the participation at a user specified percentage of overall traded volume. Actual volume is monitored constantly, every moment, so the order adjusts very quickly to the actual volume in the stock. Just as an example, this could for instance mean that the order might not get completely filled if a low volume target is set together with a large order amount in an illiquid share. The order is allowed to use the short-term order book opportunities to improve all-in execution price and getting a little ahead or behind the target participation rate. The strategy is suitable when the trader wants to directly control their participation rate and/or be more involved when the stock is trading heavily. As the strategy trades in proportion with actual market volume it is more suited for stocks whose trading volume varies substantially from day to day. Not suited for small caps / illiquid stocks if there is not enough volume to target a participation rate. Source: Nomura/Instinet Page 8 of 16
The With Volume strategy is available on European, US and Asian exchanges. European Exchange US Exchange Asia Pacific Exchanges With Volume-specific parameters: Volume target % Min volume % I Would price Execution style Auction Participation Specifies the volume target as a percentage. Only APAC Exchanges: Allows user to ensure a minimum participation. If specified, the strategy will try to complete the order at this price. I Would price will override the setting for maximum volume participation to trade as much as possible at this price. Only European and US exchanges. Lets the user decide the execution style of the order (Normal; Opportunistic or Strict). Opportunistic allows the strategy more flexibility in being ahead or behind the benchmark. Therefore the algo uses addedvalue or reduced-impact techniques at the cost of incurring more benchmark slippage. Strict tells the algorithm to stress minimizing benchmark dispersion, which means the algo will track the benchmark ahead of gaining performance. If not specified it will default to Normal, which will track the benchmark closely, while still trading opportunistically. Lets the user decide whether to participate in Open; Close; All or None of the Auctions. From automated close to auction close order will most likely remain partially filled will receive another partial fill during auction. (This is called Auction participation for European exchanges, and Exclude auctions for US/APAC exchanges but the functionality is essentially the same). Tighter to target schedule Dark block (Only APAC exchanges) If ticked, the strategy puts more emphasis on tracking the expected volume profile, and less emphasis on price improvement. If ticked, the order may float order quantities into dark pools. The use of this Page 9 of 16
posting Dark block limit price parameter may cause the order to deviate from core strategy behavior in the event of a cross, meaning the algo might deviate from a passive strategy and become aggressive in a dark pool if an opportunity to get filled inside the spread arises. Hence by default this is not ticked, i.e. does not allow floating to dark pools. A limit price for the Dark Block Posting. The Dark Block Limit Price could be considered to be set at a more aggressive price than the normal limit price due to the anonymity in the dark pool. Only for European and Asian exchanges (double check Asian when live!). Algorithmic Order: Reload Description: The Reload strategy executes the order in tranches of a defined size, entering a new tranche when the previous one is filled. The strategy places limit orders at the specified price and size of the Display Quantity. If there is a counterpart available on the order book, this will hit their quote leaving the remainder on the order book. Otherwise the order will sit on the order book until it is completely filled. Once this order has been completed the next order of size Display Quantity is sent. The reload strategy will be traded against primary as well as alternate exchanges. Although very similar to the Iceberg order there are some important differences. Reload strategy is an algorithm that simulates an Iceberg order. The strategy works in tranches with each tranche placed successively at the pre-specified limit until the entire order is filled. Reload orders lose time priority but participate on multiple venues. Iceberg orders are sent only to the primary exchange where only the specified quantity is shown at any given time. Since the entire order is sent to the exchange it does not lose time priority Important: Reload orders are not available for US equities since they operate by sweeping Multilateral Trading Facilities (MTFs) such as Chi-X, BATS and Turquoise which are only available in EU. In the US there are no MTFs but instead Electronic Communication Networks (ECNs). They are electronic trading systems that automatically match buy and sell orders at specified prices. Any US equity will by default not be allowed to be filled on the primary if you can get a better price at the other ECNs e.g. NYSE Arca. Smart Order Routing builds on this American idea to grab liquidity on other trading venues. The reload strategy is therefore designed for markets outside US. Clients should consider using a Display Size that is not too large compared to the average size on the order-book. Page 10 of 16
The Reload strategy is available on European and Asia Pacific Exchanges: European Exchange Asia Pacific Exchange Reload specific parameters: Display Quantity The size of the orders to be sent to the market, given explicitly in shares (will become a mandatory field soon as it does not make sense to have it as optional) Page 11 of 16
Algorithmic Order: Implementation Shortfall (IS) Description: In financial markets, the term Implementation Shortfall refers to the difference between the market price of an asset when a buy or sell decision is made and the all-in execution price after all costs are taken into consideration. Hence, Implementation Shortfall is the total negative effect of execution costs and adverse market movement between the time of the trading decision and order execution. The Implementation Shortfall (IS) algo order aims at minimizing the Implementation Shortfall, or in other words its objective is to achieve an all-in execution price as close as possible to the prevailing market price at the moment the order starts executing, which is known as the arrival price. Compare this for example to a VWAP-order which is benchmarked to the VWAP over the period in which it executes. On a practical level, this means that an Implementation Shortfall order unlike a VWAP might execute very quickly if it can get the whole order size executed at better than the arrival price, instead of using the entire time period specified by the client for execution. The optimization takes into consideration the current marketplace, the stock-specific trading characteristics and the size of the order. The order is then fed into the market in line with the expected volume profile. Source: Nomura/Instinet Page 12 of 16
Available on European, US and Asia Pacific exchanges: European Exchange US Exchange Asia Pacific Exchange Implementation Shortfall specific parameters: Urgency Min volume % Volume limit % I Would price Execution style Dark Block Posting (US Exchanges only) Based on the urgency specified the algorithm determines the optimal trading horizon. Minimum participation rate A cap on the percentage of actual traded volume that the order can represent. Offers protection that the order is not taking too big a share of actual market volumes. If specified, the strategy will try to complete the order at this price. I Would price will override the setting for maximum volume participation to trade as much as possible at this price. (European exchanges only) Lets the user decide the execution style of the order (Normal; Opportunistic or Strict). Opportunistic allows the strategy more flexibility in being ahead or behind the benchmark. Therefore the algo uses added-value or reduced-impact techniques at the cost of incurring more benchmark slippage. Strict tells the algorithm to stress minimizing benchmark dispersion, which means the algo will track the benchmark ahead of gaining performance. If not specified it will default to Normal, which will track the benchmark closely, while still trading opportunistically. Allows the order quantity that is not scheduled to trade in the immediate future to be posted into dark liquidity pools. The use of this parameter may cause the order to deviate from core strategy behavior in the event of a cross. Page 13 of 16
Dark block limit price Posting Rate % A limit price for the Dark Block Posting. The Dark Block Limit Price could be considered to be set at a more aggressive price than the normal limit price due to the anonymity in the dark pool. The percentage of the order to allocate to trading in the dark pools outside of the normal strategy profile. The strategy also makes use of dark pools as part of its normal trading, meaning likely a total percentage higher than the Posting Rate % will be executed in dark pools. Algorithmic Order: SmartDark / Nighthawk Description: The SmartDark (US Exchanges/Asia Pacific Exchanges) and the Nighthawk (European Exchanges) strategies are very similar in nature - they interact only with dark venues to obtain hidden liquidity so they will not trade or display quotes on any visible execution venue. Main benefits include limitation of information leakage to the market and adverse price moves. Be aware that these order types may not complete as they are posted in various dark pools at all times; you are exposed to interacting with participants in all of these pools. Available on European, US and Asia Pacific Exchanges: European Exchange US Exchange Asia Pacific Exchanges SmartDark/Nighthawk specific parameters: Min quantity Dark block posting Enables the user to specify the minimum quantity to be filled SmartDark only: Dark liquidity access if not specified it defaults to I Would. Passive: the order is sliced and floated passively to dark pools. I would: the order can be matched/crossed internally in Nomura before being floated to dark pools. Page 14 of 16
Algorithmic Order: OMX Nordic@Mid Description: Nordic@Mid offers separate continuous matching of midpoint priced non-displayed orders as a complement to the central order book. Nordic@Mid enables automatic execution for any sized orders that do not meet the MiFID Large in Scale criteria. Only for the Copenhagen Exchange. NB: OMX Nordic@Mid is not available in the tradingplatforms, it can only be placed via phone. Advanced order (non algorithmic): US Premarket Limit (CFDs only) Description: A pre-market order is designed to trade in the pre-market session in the US. The order will participate in the pre-market, and any residuals will be rolled into the continuous session as regular limit orders at the same limit price. Please note that US Pre-market Limits are currently only available on CFDs, not for Stocks. The only difference to a normal limit order is that this order allows participation in the premarket session. Things to watch for: Be aware that liquidity typically is low in the pre-market session so when orders are placed aggressively they might get filled closer to the limit price than anticipated. Available on US Exchanges: Page 15 of 16
Advanced order (non algorithmic): IEX Description: This order type executes purely on the US IEX venue. IEX, an alternative trading system (ATS), has created patent-pending technology and infrastructure designed to protect orders from Predatory Trading, a sub-class of High Frequency Trading (HFT), that attempts to identify and disadvantage traditional investor order flow. It is simply a limit order that executes exclusively on the IEX. Risk Warning None of the information contained herein constitutes an offer (or solicitation of an offer) to buy or sell any stock, CFD currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy. This material is produced for marketing and/or informational purposes only and Saxo Bank A/S and its owners, subsidiaries and affiliates whether acting directly or through branch offices ( Saxo Bank ) make no representation or warranty, and assume no liability, for the accuracy or completeness of the information provided herein. In providing this material Saxo Bank has not taken into account any particular recipient s investment objectives, special investment goals, financial situation, and specific needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and Saxo Bank assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation. All investments entail a risk and may result in both profits and losses. In particular investments in leveraged products, such as but not limited to foreign exchange, derivates and commodities can be very speculative and profits and losses may fluctuate both violently and rapidly. Speculative trading is not suitable for all investors and all recipients should carefully consider their financial situation and consult financial advisor(s) in order to understand the risks involved and ensure the suitability of their situation prior to making any investment, divestment or entering into any transaction. Any mentioning herein, if any, of any risk may not be, and should not be considered to be, neither a comprehensive disclosure or risks nor a comprehensive description such risks. Any expression of opinion may be personal to the author and may not reflect the opinion of Saxo Bank and all expressions of opinion are subject to change without notice (neither prior nor subsequent). This disclaimer is subject to Saxo Bank's Full Disclaimer available at www.saxobank.com/disclaimer. Page 16 of 16