HOW BIG BUCKS ENTER THEIR POSITIONS (REPOST FROM SS)

CategoriesFinance

Hello fellow apes,

TL;DR: Four algos that can be used to build a position: POV, TWAP, VWAP, MEAN-REVERSION

During these exciting times that more people enter the casino stock market is time to talk how algos trade.

Why is this important? Algorithms are programs with defined behaviour base on signals (calculations upon market data). Now that SHF are popular its time to try to unveil some of their simple strategies to enter the market.

BEWARE THAT THIS POST IS A VERY BASIC INTRO THAT WAS COMPOSED WITHOUT MUCH PREPARATION SOLELY FOR EDUCATIONAL PURPOSES!

I am going to describe few very popular algorithms! These algorithms are used to build positions and NOT TO MARKETMAKE. MARKETMAKING is a different topic which I could elaborate if people find this useful.

LESSSSSSSSSSS GOOOOOOOOOOOO!

Time for concentration…

So you are a fund manager and your quants tell you to buy SPY. Let’s say that you want to buy $20M.

So what do you do? Place and order in the Stock Exchange? If you do this then this will happen:

SPY Fat Finger

Don’t do that!

What you would do is to enter the position with the lowest possible impact so OTHER algorithms won’t notice your big $$! If the High Frequency (MM) algos sniff your intention you can say goodbye to the Bid Price as they will buy the everything and will sell it to you higher later on!

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So lets talk about some of the strategies are used…

Exchanges / MTFs

Here everyone can see your actions so placing big orders is not an option. However many small orders is not an option either because a fixed fee per trade will eat up your capital. You need something not too big & not to small.

  1. POV

Hey SEC this is not what you think… this is Participation Of Volume. If the trading algorithm is configured to trade at 10% of the market volume then e.g. if the market volume of the last hour is $40M it should trade about $4M of those. The interval usually tend to be continuous so for every 100$ traded the algo should have traded the 10 out of 100.

  1. TWAP

Here is usually a more urgent strategy. You simple can enter the amount of the position you like to open/close and the timespan you want to do it. The algo will try to trade equal chunks over the timespan.

  1. VWAP

This is most used algo which at first it looks very similar with POV. Here you need to have a profile of the volume that the stock trades during the day so you don’t have to REACT (POV) but to be in-front of the market… Also you need special profiles for abnormal days

  1. MEAN-REVERSION

This is a useful strategy if you believe that the stock will stay around its mean price. Lets say that you have a stock with 100$ mean price, your quants did the calculations and found that σ=5 so you configure your algo to participate at 15% of volume when price is 90$ and at 5% when price is 110$. The algo will calculate its participation level linearly so when the stock is around 100$ it would be 10% of total vol.

Here you go…. Now HEGDIES R F&K….

WELL not really… You just got a tiny taste how fund managers try to enter and exit their positions.

These strategies are not to provide returns but to minimise the market impact.

Thank you for reading,

This is not financial advice!

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