Citi launches a new suite of futures trading algos
Implementation shortfall algorithms are designed to keep or reduce that cost differential (slippage) to a minimum
US banking and trading giant Citi has launched a new algorithmic trading platform for use in the global listed derivatives markets.
The algorithms have been specifically designed to trade futures markets and contracts in North America, Europe and the Asia Pacific and will be available to Citi clients to use on all major exchanges in those regions.
The package of algorithmic strategies will include familiar benchmark execution strategies such as Time Weighted Average Price (TWAP) Volume Weighted Average Price (VWAP), as well as traditional execution strategies and order types such as market on close.
However, the new trading software will also include smart execution capabilities including an implementation shortfall strategy.
Implementation shortfall can be thought of as the difference between the price of an instrument at the time when an order is placed, the arrival price, and the price achieved once its been actioned, the execution price.
This differential is seen as a cost of trading when an order is placed without a limit or other additional price centric instructions.
The difference between these two price levels can be thought of as a form of slippage. Implementation shortfall algorithms are designed to keep or reduce that cost differential to a minimum.
These algorithms act opportunistically to take advantage of liquidity as it becomes available. However, at the same time, the algo considers other factors such as market impact and volatility, over the lifetime of the order, to achieve an optimal execution price.
In institutional FX markets, implementation shortfall algorithms will try to avoid slippage and limit a large orders market impact by creating numerous child orders from the main or parent order.
It will then spread those smaller orders across various execution venues and sources of liquidity. Such execution strategies also take account of the cost and or benefits of crossing the bid-offer spread.
Multiple execution venues will not normally be available to algos trading on exchange trading derivatives where contracts tend to trade on a single venue. Though some arbitrage opportunities may be available in markets such as the Nikkei 225 futures which trade in both Singapore and Chicago.
Speaking about the launch of the new futures execution algorithms Citi’s Global Co-Head of Futures, Clearing and FX Prime Brokerage, Sabrina Wilson, said: “We’ve made a number of key hires to drive this effort, bringing in expertise and a fresh perspective on our clients’ needs. The result is a global solution that focuses on individual market microstructure “
Whilst her colleague Gordon Bull, EMEA Head of Futures Electronic Execution for Citi said “Our clients don’t want to enter numerous parameters to execute an order.”
he added that “The complexity of operating an intelligent algorithm and fine-tuning customizations sits with us, so our clients can focus on their overall investment and trading objectives.”
Smart algorithms such as those launched by Citi are likely to play an increasingly important role in all forms of electronic trading and will allow dealing desks and even end clients to leverage their execution capabilities and to focus on issues other than just price.