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Question of the Week - April 19th 2016

How does the urgency parameter for opportunistic algorithms affect reversion?

 

Chart 1: Average T+1 Second Reversion by Urgency Setting 

 

Chart 2: Average T+1 Second Reversion by Urgency Setting in Varying Volatility Regimes 

 

  • Opportunistic algorithms afford traders the ability to select an urgency parameter for a given order. We posited that increasing urgency would result in increased reversion one second after each fill and aimed to quantify those results.
  • Results were somewhat surprising; T+1 second reversion was more favorable for higher urgency orders than lower urgency orders. Volatility conditions played less of a role on reversion than the selected urgency parameter did.
  • We theorize that high urgency settings result in more market impact and positive reversion for these orders is an effect of this impact.

 

The analysis was limited to orders executed using opportunistic algorithms for Large Cap US stocks between 1/1/2015 and 12/31/2015 with order sizes under 0.25% MDV. Reversion was measured by comparing the mid at execution time to the mid one second after; fills with T+1 second reversion greater than 10 basis points were excluded. A subset of clients, all of whom trade with multiple brokers, were included. A subset of algorithms were included based on the ability to categorize urgency parameters.

 

Refer to ITG Peer Analytics for information on available ITG Peer Group Database based analytics.

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