Agency broker Bloomberg Tradebook has introduced a new feature to its benchmark algorithms that enables users to choose an average price limit for all executions in an order rather than a hard limit per execution.
Tradebook said the functionality enables the algorithms to be consistent with portfolio managers’ instructions, as most portfolio managers want to keep the average price of a whole order, rather than individual executions, below a certain level.
According to Tradebook, most algorithms use a hard limit, which can restrict a trader. For example, if an algorithm with a hard limit of $9.25 executes a portion of the order at $9.00, it would be unable to take advantage of a further opportunity at $9.40 even though the combined average price for the total order may be below the $9.25 limit.
Tradebook argues that the new average price limit enables traders to move their limit from the execution level to the average price level, giving the algorithm more opportunities to capture liquidity and still meet portfolio managers’ instructions.
While there are instances where a hard limit is preferable, for example where the portfolio manager or trader thinks the price is too high and will come back into the trading range, a trader might use the average price limit where he or she wants to maximise liquidity capture and is willing to pay more for a stock to accumulate a position.
The average price limit is available for Tradebook’s benchmark algorithms for both US and non-US stocks.