Do Execution Algos Work in Extreme Volatility?

The VIX has spiked to its highest level since 2008. The stock market has had the fastest bear market correction ever.  Oil fell 33% in overnight markets, in one night. We’re seeing 6% moves in the S&P in the matter of 14 minutes. Suffice it to say, things have been volatile and spreads are widening.

We’re quants and algos people, not politicians or economists looking to answer what all this means. But in light of the current situation, our clients are asking us one simple question:

“Is it ever too volatile for Algo Execution?”

Our short answer would be no. Our more nuanced answer would involve changing the question a bit – to:  “Does one Algo work better than another during extreme volatility?”

To answer that, let’s look at what happens in uncertain economic times with volatile price movements. One, we typically see sharp increases in volumes. Indeed, the CME reported that they had an all time volume record of 6.8 million contracts traded in energy futures and options on March 9th.

This huge increase in volume can invalidate some of the historical parameters that are key factors in certain participation-based algorithms, such as a VWAP’s. In such times, it may be better to look at other algo types that are dynamic and rely more on real-time market conditions. We’re talking more opportunistic, short-term pricing signals that may prove to be advantageous to execution traders, who are busy attempting to make sense of price action in the markets.

So, if not a VWAP, what kind of algo is the best to use? In rough waters when a position must be exited or initiated, and clear price discovery is difficult to understand, there are three types of execution algos that might be able to get your execution closer to expectations:

  • TWAP
    What: An algo execution strategy that executes at a consistent rate over a defined time interval.
    Why: This helps to minimize slippage against time weighted average price over the course of the order.
  • Implementation Shortfall (IS)
    What: An algo execution strategy that executes in a dynamic opportunistic fashion looking to minimize risk-adjusted trading costs relative to arrival price.
    Why: IS minimizes risk adjusted slippage relative to arrival price by balancing the price risk of spreading the order out against the slippage cost of trading immediately.
  • POV
    What: This strategy executes at a consistent percentage rate in line with the market.
    Why: This follows along directly with the day’s trading activity providing real-time market movement.

It’s important to understand that just using an algo for execution isn’t a solution in and of itself. You need the right algo not just for your trade style, but for the market environment as well. In addition, all algos aren’t created equally. Some are created by quants-only. Others, like those at RCM-X have been designed, coded, tested, and implemented by our team of quants with real world trading experience. And some aren’t even on the menu, being custom designed with specific needs and market environments in mind. All that is to say – be careful out there. And make sure you know what Algo these volatile times call for. It doesn’t look to be ending anytime soon.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

logo