Algo User Guide

55 Pages·2017·0.93 MB·English

Nasdaq Exchange and Clearing
Services AB
Execution Algorithms
User Guide

Version 2.3 valid from 2017-06-07
Table of Contents
1 Document Scope ........................................................................................................ 3
1.1 Document History ................................................................................................ 3
1.2 Confidential Information ....................................................................................... 4
2 Nasdaq Execution Algorithm Services ........................................................................... 5
2.1 Background ........................................................................................................ 5
2.2 Overview ............................................................................................................ 5
2.3 Eligible instruments ............................................................................................. 6
2.4 Key benefits ....................................................................................................... 6
3 Nasdaq Algorithm Offering .......................................................................................... 7
3.1 Algo general Logics .............................................................................................. 7
3.2 The principle of Synthetic trade lots ....................................................................... 8
3.3 Algo Strategies ................................................................................................... 8
3.4 Execution Quality Reports ..................................................................................... 9
4 Algo Descriptions ..................................................................................................... 10
4.1 TWAP (Time Weighted Average Price) .................................................................. 10
4.2 VWAP (Volume Weighted Average Price) .............................................................. 13
4.3 PVOL (Percentage of Volume) ............................................................................. 15
4.4 IMSH (Implementation Shortfall) ......................................................................... 17
4.5 CLOS(E) ........................................................................................................... 19
4.6 PNPR (Performance Neutral Pair) ......................................................................... 22
4.6.1 Basket ID ...................................................................................................... 24
4.6.2 Nordic Workstation specific.............................................................................. 25
4.6.3 Examples ...................................................................................................... 25
4.7 SUPR (Setup Pair) ............................................................................................. 27
4.7.1 Example ....................................................................................................... 29
5 General Info ............................................................................................................ 31
5.1 Pre-Trade Checks .............................................................................................. 31
5.2 Special circumstances ........................................................................................ 32
5.3 Managing Algo Orders in Nordic Workstation ......................................................... 33
6 Q & A ..................................................................................................................... 34
7 Contacts ................................................................................................................. 35
8 Algo Parameters ....................................................................................................... 36
8.1 TWAP Parameters .............................................................................................. 36
8.2 VWAP Parameters .............................................................................................. 39
8.3 PVOL Parameters............................................................................................... 42
8.4 IMSH Parameters .............................................................................................. 44
8.5 CLOS(E) Parameters .......................................................................................... 47
8.6 PNPR Parameters .............................................................................................. 50
8.7 SUPR Parameters .............................................................................................. 53

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1 Document Scope
This document constitutes “Appendix 1: Description of the Service” according to the ”Terms and
conditions for the Algorithmic Trading Service”, and can be amended from time to time at Nasdaq’s
sole discretion.

The document describes the Nasdaq Execution Algorithms, offered by Nasdaq Exchange and
Clearing Services AB. The document is primarily written for Nordic Workstation users, but the logics
and descriptions are valid to the largest extent for clients using other front end applications as well.

Nasdaq Exchange and Clearing Services AB is a non-regulated entity and is not offering any
investment firm services. It is the responsibility of the Member to comply with the relevant
rules and regulations, including but not limited to ESMA Guidelines.

Execution Algorithms is offered as an additional service under separate Nasdaq Algorithmic Trading
Services Agreement with Nasdaq Exchange and Clearing Services AB.

NOTE: While the document has been prepared on the basis of the best information available,
Nasdaq Exchange and Clearing Services AB accepts no liability for decisions taken, or
systems work carried out by any party, based on this document.

1.1 Document History

Date Revision Change Description
2013-09-20 1.0 Document Created
2013-10-04 1.1 Added Algo logic and screenshots
2013-10-14 1.2 Updated parameters to be more aligned with
NWS GUI
2013-10-28 1.3 New layout with parameters at the end section
2013-11-09 1.4 Updates and clarifications and legal review
2013-11-13 1.5 Added strategy graphs and updated parameters
2013-12-06 1.6 Added updates on risk parameters
2014-01-08 1.7 Additional Legal notice
2014-01-28 1.8 PNPR – ratio strategy example added
2014-01-29 1.9 Algo link ID
2014-04-07 1.9.1 New Parameter Ratio on PNPR
2014-06-30 1.9.2 Added description on PVOL parameter Target %
2015-01-08 2.0 Updates due to re-branding
2016-01-19 2.1 Updates due to re-branding and new pairs
trading algorithm
2016-03-09 2.2 Updates to SUPR
2017-06-07 2.3 Adding AOD as destination for passive posting,
updates to PNPR & SUPR

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1.2 Confidential Information
• The information contained in this document and all its appendices in both physical
and electronic forms is the intellectual property of Nasdaq Exchange and Clearing
Services AB and contains confidential information (the Confidential Information).
Notes, documents, summaries or reports which are prepared from Confidential
Information to the extent such specifically refer or relate to Confidential Information
are themselves Confidential Information.

• The User Guide is intended to be read only by legitimate recipients who received it
from Nasdaq Exchange and Clearing Services AB or its authorized representatives
for the sole purpose of using or evaluating potential use of Nasdaq Exchange and
Clearing Services AB services for Execution Algorithms based on the Nasdaq
Algorithmic Trading Services Agreement.

• Access to or disclosure of Confidential Information shall be limited to those
employees or partners covered by a then effective legal obligation or agreement
with the legitimate recipient that prohibits the disclosure or unauthorized use of
confidential information deemed confidential by the legitimate recipient (Authorized
Employees). The existence of such an agreement with an employee or partner of
the legitimate recipient shall not operate to relieve the legitimate recipient from
liability for acts of such employee or partner that result in a breach of these
confidentiality clauses.

• Legitimate recipient shall not make copies of the Confidential Information except for
those copies required for use by Authorized Employees in the performance of the
Nasdaq Algorithmic Trading Services Agreement. Each copy, including its storage
media, shall be marked Confidential, and also include all copyright, trademark and
other proprietary notices which appear on the original. Legitimate recipient agrees
that all Confidential Information, including any copies thereof, shall be returned to
Nasdaq Exchange and Clearing Services AB or destroyed within ten (10) days of
the expiration or other termination of the Nasdaq Algorithmic Trading Services
Agreement or as soon as the evaluation the service suitability has ended.

• The legitimate recipient of the User Guide obliges not to disclose in any form the
Confidential Information or any information derived therefrom to any third party
without the prior written consent of Nasdaq Exchange and Clearing Services AB
and obliges to hold the Confidential Information in safe custody.

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2 Nasdaq Execution Algorithm Services
2.1 Background

Nasdaq has implemented a set of traditional execution algorithms (Algos) via the INET
trading system. The cost efficient solution is based on an Algo engine provided by Nasdaq
Exchange and Clearing Services AB and utilizes Nasdaq Nordic’s Smart Order Router.

2.2 Overview

Nasdaq Execution Algorithm Services provides clients that are member firms on certain
Nasdaq Nordic markets with the ability to enter algorithmic orders through a third party
provider.

Using Nordic Workstation (or via FIX), clients can make use of the provided strategies to
execute large orders with minimized market impact while preventing information leakage,
and at the same time access to liquidity across multiple trading venues via Nasdaq Nordic’s
smart order routing service.

Each of the Algo strategies provides a different method of order execution and fills the
initial parent-order by sending a sequence of child-orders to the market.

Child orders are the ones that technically trade, clear and settle.

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Each algorithm’s functionality is controlled by a set of parameters determined by the user.

Both the parent-order and the child-order are visible in the Order Management window in
Nordic Workstation and available on FIX drops. To cancel an Algo order, the trader is
prompted to always do so by cancelling the parent order. Cancelling a child order leads to
the Algo Engine sending a new child order.

Modification of an Algo order is not supported. Instead, the NWS User is prompted to use
Cancel + New to replace an existing Algo order. This applies for clients using other front
end applications as well. Here a modification will lead to FIX Cancel and new parent order.
2.3 Eligible instruments

Instruments eligible for execution algorithms are all primary listed stocks on relevant
Nasdaq Nordic markets; Nasdaq Stockholm, Nasdaq Helsinki, Nasdaq Copenhagen and
their respective First North markets including instruments traded on the relevant Away
Markets (as defined the Terms and Conditions for Nasdaq Nordic Exchanges’ Smart Order
Routing) and possibly in Nordic@Mid, Auction on Demand order books. Norwegian stocks
traded on First North Sweden are not included in the scope.
2.4 Key benefits

• All trades in own name. All executions coming out the algorithms will be printed in
the name of the member (away market trades are mirrored on exchange).
• Anonymity. Anonymity of parent order and protection against information leakage.
• Cost efficient. Pay-as-you-go service based on shared co-located Algo installation.
• Accessibility. Available on Nordic Workstation and on existing FIX connectivity.
• Range. Access to integrated smart order routing logic.
• Flexibility. Fine tune and control Algo orders based on a set of user defined
parameters.
• Neutrality. Broker Neutral.

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3 Nasdaq Algorithm Offering
Algorithmic trading automates otherwise manual order execution management. Clients can
use one of many different strategies that best fit their needs, however there is also a
common framework – the Algo logic – which govern how strategies are behaving.
3.1 Algo general Logics

A limit order with a longer expected time until fill has a greater level of risk. A buy (sell) limit
order placed at a more favorable price, farther below (above) the bid (ask), will have a
longer expected time until fill. Expected time translates into level of riskiness, and calibrates
the price and size of its orders to get the best execution for the users’ level of risk
tolerance.

Short-term market momentum also plays a role in the formulation of the order placement.
In placing limit order to buy (sell) as stock, if the price has downward (upward) momentum,
the Algo will trade less aggressively, as it is likely that the price will become more
favorable. The inverse is also true; the Algo will place limit orders more aggressively if the
price of the stock it is buying (selling) has been rising (falling).

Bid-ask spreads factor into the Algos formulation of the price, size and location of the
orders it places. The model output of this information, the overall strategy goal, and the
constraints inform the Algo of the idealized order placement of passive orders.

The placement of limit orders risks the transmission of information that could be used
against the trader. It is possible for a market participant to observe a series of child orders
and extrapolate the parent order from this data. Armed with this information, a market
participant could trade against and undermine the trader’s position. This effect can be
particularly acute for instruments that have low trading volume, such as small cap equities.

The Algo addresses these concerns over gaming and information leakage in multiple ways.
Smart order routing is effective not only in locating favorable prices, but making trading
behavior less predictable.

The Algo’s stealth compression order placement model further curbs the transmission of
information to the market by adding an element of randomization to order placement,
effectively cloaking the parent order as it is executed.

The Algo attempts to achieve its benchmark goals with a smooth execution around the
targeted trading rate, and can maintain this desired trading rate through the placement of
passive limit orders and aggressive marketable orders.

For a given strategy, the Algo’s behavior will be subject to a number of constraints. These
parameters, entered by the user, serve a variety of purposes. Some constraints act as
absolute thresholds within which the Algo must operate, while others act as guidelines
governing the Algo in relation to real time market conditions.

Algo’s has ability to incorporate real time data regarding eligible instruments on Nasdaq
Nordic markets and Away Markets into its trading decisions. A primary market factor that

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informs the Algo’s behavior is the fill rate of limit orders. The Algo uses this observed fill
rate to calculate the expected time until fill of each order that it could place.

Algo’s may post child order volume in both Nordic@Mid and Auction on Demand in order to
capture possibly mid-point prices.

3.2 The principle of Synthetic trade lots

Order placements by the Algo engine will be done in increments of Synthetic trade lots.
This lot size is calculated by the Algo and is based on the past 20 days of total trading,
based on public data. In general the Algo will randomize order sizes to be between the 25th
and 75th percentile of executed quantity distributed around the 50th percentile, which
happens to be close to 0.5 and 2 times (respectively) of the median quantity for each stock.

Additionally for small parent orders the Algo may allow smaller orders than the Synthetic
trade lot. This happens when the Order Quantity < 10 * Synthetic trade lot. In this case the
Algo will send the minimum number of orders based on:

Min of Order quantity / 10 and Order Quantity / (time / 5 minutes)

Example:

Synthesized trade lot is 1000 shares. The Algo will randomize in lots of 500-2000 shares
when placing child orders.

If the Order quantity is 7000 shares which is less than 10 * Synthetic trade lot, and the time
is 2.5 minutes the following calculation will take place:

Order quantity /10 = 7000/10 = 700
Order quantity / (2.5 / 5) = 1400

In this case the Algo will send 10 child orders of approximately 700 shares per child.

The Synthetic trade lot can be overrun by the trader. The trader has the possibility to
restrict the Algo from sending too small child orders into the market, which is governed by a
parameter (Min Child Value). If the trader submits a value in this field the Algo will not
generate child orders below the specified value. With this trader may for example strive to
avoid too small trades due to post trade costs especially in bilaterally cleared stocks.

3.3 Algo Strategies

1. Time Weighted Average Price (TWAP) - Executes desired quantity at a constant
rate
2. Volume Weighted Average Price (VWAP) - Pre-trade schedule based on
historical volumes
3. Percentage of Volume (PVOL) - Targets a user-defined participation rate

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4. Implementation Shortfall (IMSH) - Minimizes risk-adjusted trading costs relative to
the arrival price
5. CLOS(E) - Minimizes risk –adjusted trading costs relative to the closing price
6. Performance Neutral Pair (PNPR) - Targets relative performance of execution at
or better than a specified basis point spread between a pair of stocks
7. Set Up Pair (SUPR) targets to capture a certain spread when buying one stock and
selling the other. This strategy is available from February 22, 2016.
3.4 Execution Quality Reports

Member Algo Trade files are delivered after each trading day to the external FTP server
located at IP address 217.73.6.18. Files will be stored for a period of 15 days. Access is
granted via a username and password specific to each customer.

Access is available via FTP Client:
Access 217.73.6.18 by logging in with the username and password. Port to be used is 22
and the protocol should be SFTP (Note: Your FTP client needs to support SSH File
Transfer Protocol).

Login credentials will be provided in connection with activation of the Algo Service.

Please contact [e-mail] for further details on this service.

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4 Algo Descriptions

4.1 TWAP (Time Weighted Average Price)

“Spread it out over the day/number of hours”

TWAP
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

% of Order Finished

This is a relatively straightforward algorithm that executes the trade over a timeframe
determined by the user. The TWAP aims to trade at a constant rate over this interval (using
stealth compression order placement model). This strategy is attractive to clients who want
to stretch out their trading in a pre-determined time horizon.

Even though the figure above indicates a linear trading pattern, the algorithm will create a
trading trajectory based on the entered parameters. Based on this trajectory the Algo will
allow the executions falling behind or leading with a certain tolerance. The trading trajectory
is not exposed to the trader. The algorithm does have “room/Lag & Lead” for price
improvement and will stagger time of order placement to prevent any potential gaming
caused by repetitious order placement. This means that the algorithm will spread out the
orders randomly in time.

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