Agency brokerage house Instinet has launched a new implementation shortfall algorithm. Called Wizard PRO (Portfolio Risk Optimizer), it aims to optimize a portfolio’s trading schedule based on the correlations and natural hedges that exist among the component stocks.
Like Instinet’s Wizard algorithm, WizardPRO relies on the U.S. Short-term Equity Risk Model and OpenOptimizer from Northfield Information Services, a provider of risk forecasting models and portfolio construction tools.
“Correlations and natural hedges exist among any group of stocks, no matter how small or dissimilar,” says Michael Plunkett, president, North America, at Instindet. “Wizard PRO takes these into consideration in setting the trading schedule, whether for a portfolio of hundreds of stocks or a half dozen stocks, thereby reducing the implementation shortfall of the trade.”
Like Wizard, Wizard PRO is available through Instinet’s Newport and Instinet Trading Portal front-ends and allows traders to set limit prices and start and end times for trades, as well as choose among four styles—passive, normal, aggressive and super-aggressive—depending on the desired execution timeframe.
Using Northfield’s 20-factor risk model and optimizer, Wizard PRO develops a customized trading schedule where each stock is traded according to projected market impact, volatility and correlation with the other names in the list.
Instindet says users of its Newport front-end can also add additional data points, such as their own expectation of a portfolio’s intra-day term alpha return, along with several other customizable parameters.
“Portfolio traders often use cash balancing and sector neutrality as basic hedging techniques when executing a trade,” says Instinet in a Statement. “Wizard PRO, however, takes this approach one step further by Identifying hedges that might not be as apparent, such as those between airline and technology stocks, for example. Additionally, rather than taking a static view of risk, Wizard PRO builds a trading schedule that consider and show different trading scenarios change the composition—and thereby the risk profile—of the portfolio as it is being traded. The algo will also re-optimize its trading schedule on the fly as users take advantage of block trading and crossing opportunities that arise during the day.”
Wizard PRO is the eleventh algorithm in released by Instinet. Its products include scheduling algorithms, such as Wizard, Global VWAP or Volume Participation; investment strategy-specific algorithms for pairs trading and risk arbitrage; and intelligent access algorithms, such as BlockPeg, Cobra and Nighthawk.