A Tale of Two Traders
5
quity Research & Strategy OOMBERG TRADEBOOK ® APRIL 2009 E BL A Tale of Tw o Traders BLOOMBERG TRADEBOOK ® analyzes the behavior of US equity traders and global equity traders in response to extreme volatility “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair.…” Charles Dickens, A Tale of Two Cities Figure 1 The classic Dickens story of the differences between London and Paris during the French Revolution is a surprisingly accurate analogy for equity traders during the recent period of increased volatility. Last fall, the major volatility indexes rose from 20 to approximately 80 (Figure 1). From August 2008 to December 2008, volatility was at historic highs. In 2009, volatility has lowered and now appears to have settled into a trading range of 35-50. So, while volatility normally traded at 15-30 in the past, many traders believe that the new normal range from this point forward will probably be between 35 and 50. With stock prices experiencing large intraday movements, Bloomberg Tradebook’s quantitative research group compared the trading behavior of US and global equities traders in response to the increases in volatility. Using analyses that started in September 2008, they found that traders of US stocks tended to shy away from VWAP-type algorithms and picked spots in the market. Global stock traders, however, went back to using time and volume-sliced algorithms. Global Equities Prior to the volatility increases of late 2008, global equity traders tended to prefer volume participation strategies over VWAP/TWAP scheduled algorithms. Then, when volatility spiked, traders decreased their usage of both. However, in November 2008, as volatility once again exeeded 80, more traders started utilizing the VWAP algorithm (Figure 2). There are several possible explanations: • VWAP is a more widely used benchmark in the global equity markets. Other benchmarks (like arrival price) have not experienced the same level of success in the execution process. • During times of extreme volatility, it is difficult to pick spots in the market. Many traders are now Bloomberg Tradebook Trading Research & Strategy Gary Stone, Director +1 212 617 2297 | [email protected] Ron Taur, Head of Algorithmic Trading Product Development +1 212 617 1584 | [email protected] Shireen Uttam, Head of Globa l Equities Product Development +1 212 617 5544 | [email protected] Sabrina Rovelli, Head of US Equities Product Development +1 212 617 4924 | [email protected] Kate Confrey, Research Associate +1 212 617 5688 | [email protected]
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Transcript of A Tale of Two Traders
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quity Research & Strategy
OOMBERG TRADEBOOK ®
APRIL 2009
E BL
A Tale of Two Traders
BLOOMBERG TRADEBOOK ® analyzes the behavior of US equity
traders and global equity traders in response to extreme volatility“It was the best of times, it was the
worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope,it was the winter of despair.…” Charles Dickens,
A Tale of Two Cities
Figure 1
The classic Dickens story ofthe differences betweenLondon and Paris duringthe French Revolution is asurprisingly accurate
analogy for equity tradersduring the recent period ofincreased volatility.Last fall, the major volatilityindexes rose from 20 toapproximately 80 (Figure 1).From August 2008 toDecember 2008, volatilitywas at historic highs. In2009, volatility has loweredand now appears to have
settled into a trading range of35-50. So, while volatilitynormally traded at 15-30 in
the past, many tradersbelieve that the new normalrange from this point forwardwill probably be between 35and 50.
With stock pricesexperiencing large intradaymovements, Bloomberg
Tradebook’s quantitativeresearch group comparedthe trading behavior of USand global equities tradersin response to the increasesin volatility. Using analysesthat started in September2008, they found thattraders of US stocks tended to shy away from VWAP-type algorithms and picked spots in the market. Global stock traders, however, went back to using time and volume-sliced algorithms.
Global Equities Prior to the volatilityincreases of late 2008, globalequity traders tended toprefer volume participationstrategies over VWAP/TWAPscheduled algorithms. Then,when volatility spiked,traders decreased their
usage of both. However, inNovember 2008, as volatilityonce again exeeded 80,more traders started utilizingthe VWAP algorithm (Figure2).
There are several possibleexplanations:
• VWAP is a more widelyused benchmark in theglobal equity markets.
Other benchmarks (likearrival price) have notexperienced the samelevel of success in theexecution process.
• During times of extremevolatility, it is difficult topick spots in the market.Many traders are now
Bloomberg Tradebook
Trading Research & StrategyGary Stone, Director+1 212 617 2297 | [email protected]
Ron Taur, Head of Algorithmic Trading ProductDevelopment+1 212 617 1584 | [email protected]
Shireen Uttam, Head of Global Equities ProductDevelopment+1 212 617 5544 | [email protected]
Sabrina Rovelli, Head of US Equities ProductDevelopment+1 212 617 4924 | [email protected]
Kate Confrey, Research Associate+1 212 617 5688 | [email protected]
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much more risk averseand choose to spreadtheir executions over theday.
Global Algorithm Usage
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VWAP Volume Participation VIX
Figure 2
• Many traders had anincreased workload near
the end of 2008because of reducedheadcounts or portfoliorebalancings thatresulted from lowershare prices. As aresult, trading thesepositions becameextremely difficult tomanage, so tradersreturned to the VWAPalgorithms.
And in January 2009, whilevolatility started to settle intoits new range, VWAP usagecontinued to pick up, andparticipation strategiesdeclined.
US Algorithm Usage
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To help traders execute involatile markets, Tradebookoffers two types of VWAPalgorithms: BWAP and
DWAP.• The BWAP algorithm is a
straight scheduledalgorithm that works toattain a VWAPbenchmark by replicatingtrading based on thevolume patterns of thepast 50 days.
• The DWAP algorithmworks to beat the VWAPbenchmark by usingstatistical forecastingtechniques todynamically respond tointraday changes involume patterns.
VWAP Volume Participation VIX
Figure 3
During the period ofincreased volatility,Tradebook’s quantitativeresearch group found thattraders chose to rely more on
the BWAP algorithm, eventhough DWAP continued tooutperform BWAP in periods
of high volatility.
US EquitiesThe US equity traders tookan entirely different approachto execution during thevolatile period (Figure 3).During the increase involatility in October 2008, USequities traders gravitatedmore toward participation
strategies, tactical tradingstrategies, and DMA thantowards VWAP. Theyappeared, instead, to pickprice points and sought totake greater control overorders rather than obtainingthe VWAP. In fact, whenlooking at the usage ofTradebook’s tacticalstrategies, usage of trader-
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Figure 4
Figure 5
driven algorithms (such as B-SmartSM) grew exponentially.
Tradebook OffersSolutions for Any MarketConditionBased on this research,
Bloomberg Tradebookexpects that, as volatilitychanges continue, USequities traders will probablycontinue to want greatercontrol over their orders, andthat traders will probablyprefer DMA, tactical, andother high touch tradingstrategies over benchmarktrading strategies.
Tradebook also sees anincrease in the use of“scaling,” where traders allowbenchmark strategies todrive orders. (If the stockprice moves to a certainlevel(s), though, the strategy
is automatically modified.)
For example, in Figure 4, atrader wants to buy 500,000shares of IBM. The market isgenerally stable, so hedecides to start an execution
with a Go-Along algorithmparticipating at 10%. Withscaling, the trader haselected to pause the strategyif the stock moves above$88.50. And, if the stockfalls below $87.65, the traderhas decided to be moreaggressive and participate at25% of volume.
Bloomberg Tradebook
enables traders to moveseamlessly betweenalgorithms, tactical strategiesand DMA, when necessary.For example, assume thatthe trader is in the middle ofexecuting his Go-Along
strategy when a large offerappears. The trader can takethe offer and automaticallydecrease the remainingbalance of the benchmarkalgorithm order (Figure 5).
The Bloomberg Tradebooksuite of products providestraders with the flexibility tochoose the algorithm that isappropriate to their strategy,whether it is high touch, lowtouch, or a combination ofthe two. And, given today'svolatile environment, tradersneed the ability to make achoice that fits their tradingstyle.
(BTMI <Go> displays acomplete list of BloombergTradebook’s global marketand product offerings.)
Below is a list of TradebookBenchmark Algorithms andTactical Strategies
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Tradebook BenchmarkAlgorithms Design
DWAPExecutes seeking a VWAP benchmark forecasting algorithm that uses dynamic real-timemarket information and proprietary probing results.
BWAPExecutes seeking a VWAP benchmark forecasting algorithm that uses historic marketinformation to schedule participation.
TWAP Executes evenly over a time interval scheduled algorithm.
Go-Along Executes using a target volume participation rate.
VIPExecutes using a target participation rate without catching up if volume is missed due to theprice being above the set limit.
Arrival PriceSeeks average price benchmark of the mid-point of the bid/offer spread at the time order isentered, with real-time adaptation.
BlockCross + Dark (US Only)
Executes seeking to minimize impact and maximize size by trading only with BlockCrossATS and dark pools.
TradebookUS Equity TacticalStrategies Design
Hide and Sweep Stealth strategy that sweeps market when your price is displayed out loud without posting.
FireSweeps market when your price and size is displayed out loud while posting intelligently toseek to maximize exposure if the market is swept. You control it by adjusting its Aggressivelevel.
Hide and Fire Stealth strategy that sweeps market or nibbles at it when your price and size is there withoutposting. You control it by adjusting its Aggressive level.
B-SmartSM
Intelligently posts your order outloud in the most active venues using dynamic real-timemarket information and proprietary probing results, seeking to maximize your exposuremarket sweeping. You control it by adjusting its Aggressive level.
Hide and B-Smart SM Stealth version of B-Smart strategy that posts your order in the most active venuesHIDDEN order books. All other features remain the same.
TradebookGlobal Equity TacticalStrategies Design
HIDE & SWEEP Stealth strategy that sweeps market when your price is displayed out loud without posting.
HIDE & FIRE Stealth strategy that sweeps the market or nibbles at it when your price & size is therewithout posting. You control it by adjusting its Aggressive level.
FIRE
Strategy that sweeps market or nibbles at it when your price & size is there. You control it by
adjusting its Aggressive level.
Nothing in this document constitutes an offer or a solicitation of an offer to buy or sell any security or other financial instrument or constitutes any investment advice or recommendation of anysecurity or other financial instrument. BLOOMBERG TRADEBOOK believes that the information herein was obtained from reliable sources but does not guarantee its accuracy.
Communicated by Bloomberg Tradebook Europe Limited, registered in England & Wales No. 3556095, authorized and regulated by the UK Financial Services Authority No. 187492. Thiscommunication is directed only at persons who have professional experience in the investments which may be traded over the systems and certain high net worth organizations.
Bloomberg Tradebook LLC member of FINRA (www.finra.org)/ SIPC/NFA. Bloomberg Tradebook do Brasil is the representative of Bloomberg Tradebook LLC in Brazil registered with the BACEN.
Bloomberg Tradebook Services LLC, Bloomberg Tradebook Australia PTY LTD ABN 36 091 542 077 ACN 091 542 077, Bloomberg Tradebook Do Brasil LTDA., Bloomberg Tradebook Canada CompanyMember of CIPF, Bloomberg Tradebook Limited, Bloomberg Tradebook Hong Kong Limited the first ATS authorized by the SFC–AFU 977, Bloomberg Tradebook Japan Limited member of JSDA/JIPF,Bloomberg Trading Services Japan LTD, Bloomberg Tradebook Singapore Pte Ltd Company No. 200104338R, Bloomberg Trading Services (Singapore) Pte Ltd Company No. 200101232G. BloombergTradebook Bermuda LTD, licensed to conduct Investment Business by the Bermuda Monetary Authority.
BLOOMBERG, BLOOMBERG PROFESSIONAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG POWERMATCH and BLOOMBERG.COMare trademarks and service marks of Bloomberg Finance L.P.("BFLP"), a Delaware limited partnership, or its subsidiaries. BLOCK HUNTER, BWAP, DEFINING LIQUIDITY, LIQUIDITY DOME andTRIGGER TRADING are trademarks and service marks of Bloomberg L.P. ("BLP"), a Delaware limited partnership. The BLOOMBERG PROFESSIONAL service (the "BPS") is owned and distributedlocally by BFLP and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the "BLP Countries"). BFLP is a wholly- owned subsidiary of BLP. BLP providesBFLP with all global marketing and operational support and service for these products and distributes the BPS either directly or through a non-BFLP subsidiary in the BLP Countries. BloombergTradebook is provided by a BLP subsidiary, Bloomberg Tradebook LLC, and its affiliates and is available on the BPS.
