02.10.2014
By Terry Flanagan

Instinet Adds Passive Trading Strategy

Instinet has added MAKE, a strategy for passive trading, to its Execution Experts algorithmic trading suite, giving institutional traders access to advanced liquidity providing tactics used by market makers.

Using historical information, recent trading patterns and real-time market data, MAKE sizes and distributes child orders at multiple price levels and across destinations, controlling adverse and negative selection while reducing exposure to signaling, gaming, and predatory techniques.

“In certain instances, a buy side trader may wish to trade only passively to save the spread,” said John Comerford, head of global trading research at Instinet. “There can, however, be significant implicit costs in doing that–specifically adverse and negative selection–as well as leaked information. MAKE addresses those issues.”

MAKE allows users to specify a range of different styles of liquidity providing, from “patient” to “urgent”. At lower urgency levels, Instinet’s signal-driven FADE logic will be more sensitive to potentially adverse market conditions, and will briefly pause or slow trading to reduce adverse selection. At higher urgency levels, with more emphasis on minimizing negative selection, child orders will tend to be larger and more frequent.

“Many institutional clients today have an incredibly deep understanding of the strategies they’re using and are consequently looking to be able to customize them as they feel appropriate,” Comerford said. “Similar to the various audio level controls on a stereo system, MAKE allows users to tune their settings depending on how patient or urgent they want to be.”

Two of the biggest issues algo users face, particularly when trading on the passive side, are adverse selection and negative selection. Adverse selection occurs when a trade is poorly timed–a stock is bought on its way down or sold on its way up–while negative selection occurs when a potentially advantageous trade is missed because the algo is being overly cautious.

“MAKE, with its FADE logic and laddering capabilities, helps mitigate these in what we believe is a very sophisticated manner,” Comerford said.

MAKE is particularly well suited for low information trades where opportunity cost is less important than impact reduction—particularly at low or moderate urgency levels—or large orders, where limiting information leakage and potential signaling is paramount. At higher urgency levels, it can also be used effectively for trades with higher opportunity costs, trading larger volumes while remaining passively priced.

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