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October 1, 2013

Teaching an Old Algo New Tricks

Wolverine Execution Services adds two new volume weighted average price algorithms where users can lengthen the duration of their orders

By By John D'Antona Jr.

Volume-weighted average price, or VWAP, algorithm may be an old dog, but they can absolutely be taught new tricks and operate in improved ways.

That became clear to Wolverine Execution Services-the agency brokerage affiliate of the large options market maker, whose first foray into equities algorithms came last year-when it introduced an arrival price strategy.

Kevin Kernan

Wolverine recently launched two new VWAP algorithms: one for single stocks and one for baskets.

"Even though VWAP is tried-and-true, especially for those trading risk arbitrage, it's still widely used when benchmarking or adjusting benchmarks when there is an event in the underlying corporate stock," said Wolverine director of product development Kevin Kernan. "These new algos are targeted at those clients who want to deploy a VWAP strategy but with the value-added logic of Best X."

The goal of Wolverine's "Best X" proprietary execution logic is to reduce the potential for market impact, price slippage and adverse selection or gaming by high-frequency traders. When applied to the VWAP algorithms, it stretches trades out over a selected time range.

WEX has risk arbitrage clients, those who bet on mergers, who started with its Best X arrival price algo and wanted the ability to lengthen their trading horizons. Normally, the Best X algo completes a trade within a 10-minute horizon, Kernan said, and these algorithms allow more flexibility in the time frame in which they work.

Wolverine's new VWAP algos can be set to work the entire trading day. They can still function also for shorter time horizons, the shortest being five minutes.

"Clients wanted to be able specify a longer term for their orders," Kernan said. Thus, the firm built the algorithms with this new functionality.

The VWAP algo works orders using WEX's "Best X" algorithm's proprietary execution logic to spread trades along a historical volume distribution, Kernan added.

The volume-weighted average price of a stock is calculated by dividing the value traded of the stock over a given time period by the total share volume traded over that time period.

VWAP is often used as a trading benchmark by investors who aim to be as passive as possible in their execution.The aim of using a VWAP trading target is to ensure that the trader executing the order does so in line with volume on the market.


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