Agency broker and trading technology provider ITG has unveiled a new algo for trading US market opening auctions, offering buy-side traders the ability to trade in size at a single price.
The new strategy, called ITG Dynamic Open, sources liquidity from the opening auctions at US exchanges NYSE Euronext and Nasdaq OMX and seeks to limit the price impact that can arise from over-participation.
The strategy uses historical analysis and dynamic imbalance information from both exchanges to decide whether or not to participate in the available liquidity during the opening auction.
“We conducted a lot of quantitative analysis to look at the most efficient way of sourcing liquidity at the open auction by monitoring imbalances,” Jeff Bacidore, head of algorithmic trading, ITG, told theTRADEnews.com. “The strategy dynamically responds to real-time information from the opening auction, which we think is unique for this type of strategy.”
According to Bacidore, opening auction trading can account for up to 4% of a typical day’s overall volume on each exchange, but more on options expiry and triple witching dates – i.e. when contracts for stock index futures, stock index options and stock options all expire on the same day. According to data from Thomson Reuters, NYSE Euronext and Nasdaq OMX accounted for 45.5% of US equity trading in February.
“Tapping into this volume offers traders the ability to get a large trade done at a single price, which is advantageous for institutional investors,” Bacidore said. “Many firms also use the opening price as their benchmark for trading, so this algo offers a way to achieve this cleanly and efficiently.”
The opening auctions at Nasdaq OMX and NYSE Euronext have different rules on how orders are handled, which can pose challenges for buy-side traders looking for pre-market open liquidity, claimed Bacidore.
NYSE Euronext, for example, uses the previous night’s closing price as the reference price for stocks and disseminates imbalance information from 07.30, allowing market participants to enter, modify or cancel orders until the market open.
By comparison, Nasdaq OMX uses real-time order information as its reference price and only publishes imbalance information at 09.28 and only allows members to offset imbalances.
Bacidore added that similar dynamic methodology would be applied to ITG’s closing auction algorithm, which is in the process of being upgraded.
The Dynamic Open algorithm and ITG’s other strategies are available via its Triton execution management system and via a FIX connection from third-party trading systems.
The firm offers algos across 35 markets in the Americas, Asia-Pacific and EMEA regions.