Trading Algos Consume R&D

Terry Flanagan

Citi’s pairs trading functionality builds upon Dagger strategy.

Citi’s newly-launched pairs trading functionality for equity securities, which enables traders to execute market neutral strategies to leverage changing market conditions by simultaneously selling and buying highly correlated securities, is the result of intensive research and development.

“Our quant team worked directly with traders in the U.S. and Europe, both internal and external to Citi, to design and perfect the strategy,” Young Kang, global head of algorithmic products at Citi, told Markets Media.

The pairs algo is built on Citi’s Dagger strategy, with the ability to optimally post in lit and dark venues, including Citi Match, to fully leverage rich pool of retail liquidity.

“This is critical for pairs algo as all three key aspects of great pairs algorithms– smart front-end, sophisticated algorithmic logic, and  proper access and placement of orders into discriminate set of liquidity venues– are achieved with this release,” said Kang.

Risk arbitrage (i.e., merger arbitrage) and statistical arbitrage (i.e., convergence trading), both of which are covered by the Citi pairs algorithm, account for the lion share of current demand, Kang said.

Citi’s pairs algorithm leverages a unique aggression level methodology together with other sophisticated parameters to help optimize hedging strategies.

Akin to Citi Dagger with aggression level 1-5, pairs strategy will also allow users to express aggression level 1-5 which can be customized specific to individual traders.

“Aggression levels, which loosely resembles participation rate, will allow finer control of the strategy by the user to express balancing of market impact and opportunity cost,” said Kang.

Other advanced parameters include max imbalance, max slippage, max fill timeout and lead/follow.  These are not required but can be specified by the user to manage specific order requirements.

“For example, the strategy will smartly lead with the illiquid leg by default but the user can specify the leading leg if he or she chooses to do so,” Kang said.

The Dagger algorithm strategically manages an order across a range of dark pools and crossing networks, and is designed to discreetly capture unique, high quality, non displayed liquidity.

It utilizes a range of optimized order routing and antigaming strategies to avoid signaling the market while also capturing maximum liquidity.

Portware and ConvergEx’s RealTick have already made the Citi pairs algorithm available in their trading platforms. Additional vendors are expected to roll out the strategy in February.

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