Pragma Lifts Pair, Block Trades
Algorithm creation has turned from a revolutionary to an evolutionary business, as buy- and sell-side needs change at a more granular level.
For Pragma Securities, a multi-asset technology firm, this means building on its Pragma360 algorithm suite – making it incrementally better, more efficient and bespoke to meet the evolving needs of the sell side, and by extension, the buy side. The firm has recently unveiled new block trading and pairs capabilities for the Pragma360 Suite for equities, namely the Pairs 2.0 algorithm and the release of conditional order inclusion and functionality in its algos.
According to David Mechner, CEO of Pragma Securities, as traders require more flexibility in sourcing liquidity in today’s ultra-complex market structure, the need for advanced and customizable algos is clear.
“The incorporation of conditional orders into the platform helps traders combat the challenge they face with thin quoted markets and small average trade sizes in most US trading venues,” Mechner said. “Similarly, Pairs 2.0 incorporates a host of improvements to provide our customers with a really robust and flexible tool.”
First up is Pairs 2.0. Curtis Pfeiffer, Pragma’s chief business officer, told Traders Magazine that Pairs 2.0 is a wholesale rewrite of the Pragma360 pairs algorithm, providing increased control over pairs trades, through trade scheduling and rate controls, and more advanced order types.
Pairs trading has gained steady momentum since 2011, when stocks within the market became more correlated. That is, stocks began to move more in tandem with one another, and many firms look to help the buy side trade more than one stock (i.e. a pair) at a time. Also, Pairs and other arbitrage strategies profit from small pricing discrepancies–they involve buying one instrument and selling another correlated security. As the buy side struggles to generate alpha and capture more ‘micro’ alpha, the need and popularity of pairs trading becomes clearer.
“2.0 is a complete upgrade and update of our existing pairs algo,” began Pfeiffer. “As M&A activity has been more robust, the sell side has been using more of these types of algos and looking for ways to trade pairs. What we’ve done is given them greater control – allowing traders to set how the algo places orders in the market, how fast the orders get distributed or the maximum volume to participate.”
The more choices and functionality, the easier it is for the buy-side trader to trade. And for Pragma’s sell side clientele, better ways to serve the buy side and stay relevant.
The first iteration of Pairs allowed for just two stocks to be traded in tandem and the buy-side trader simply input his cash constraint. While this sufficed back in 2012, traders now are demanding more granular control and operational transparency, Pfeiffer added.
“We’ve also made other functional changes to our trade support tools – modifying the whole Pragma360 platform, including Panorama, our real-time algo management system, trade reports and our TCA component, to ensure Pairs 2.0 works,” Pfeiffer said. “Again, this allows our broker clients to better customize the algo and incorporate the functionality that their buy-side client wants to leverage.”
The other new development in Pragma360 is the inclusion of conditional orders into the algorithms. Simply put, a conditional order is one that will be submitted or canceled if set criteria are met, which are defined by the trader entering the order.
As Pragma sees it, conditional orders are becoming increasingly popular to source large blocks of stock off board or in dark pools. By including conditional order functionality into the Pragma360 Suite, Pfeiffer said that buy-side traders would gain more flexibility in their strategies and not miss block opportunities.
So how does it work?
The conditional order operates by sending out multiple order indications, with pre-set parameters to several dark pools at the same time. If there are counterparty orders within the pool that match these parameters, the algorithm knows to send a firm order to the specific pool and cancels the other outstanding conditional orders. This facilitates a smoother and more efficient trade execution process for block trading.
“Previously our algos only sent out firm orders,” Pfeiffer said. “But the conditional order is akin to sending out an indication of interest and allows the trader to control the minimum fill size. If two conditional orders agree, an automated execution will occur. There is no manual interaction, less slippage and leakage.”
Furthermore, the conditional order type prevents any ‘over-execution’ while maintaining the trader’s goal – to get a block trade done.
“Our clients are already trading in the dark, but now we’ve given them another way to access dark liquidity more efficiently,” Pfeiffer said. “Conditional orders provide a much more thoughtful and automated process for sourcing liquidity and reducing market impact.”
Broker-dealer algorithms are evaluated, normalized and eventually rewarded for their performance.
Are trades executed in line with the intent of the orders?
Cowen estimates at least 6 basis points saved per block trade, more for less liquid securities.
eFinancialCareers reports that low-vol markets favor man over machine.
Offering scrapes public quotes to create firm prices.