The Challenge: To buy 1.5 million Mythica Trust shares in a single trading session, with no specific benchmark other than best execution. The session coincides with a re-weighting day so traded volume is expected to be approximately 25 million rather than the norm of 1 million.
The Algo: A broker-developed liquidity-seeking algorithm that has the discretion to take favourable trading opportunities including internal crossing (to minimise market impact and improve price) as well as sweeping all external sources. In addition to a limit price, the algorithm allows the user to set:
- An urgency parameter ranging from 1 to 5 that controls targeted participation in the order book. A setting of 1 (least urgent) only allows internal crossing, while 5 (most urgent) places no volume restriction on order book participation;
- A completion price at which the algorithm will attempt to buy as much of the asset as possible up to the total order size, ignoring all other constraints.
7.30am: The trader sets the initial algorithm
parameters. Mythica closed last night at 355p and will probably
open around there or slightly lower, so relatively conservative
settings are chosen:
- Urgency parameter of 3 (approx volume target in the order book of 15%)
- Limit price of 350p
- A completion price of 340p
- 100% of the order put into the algorithm
8.00am: (Quantity filled - 0) Mythica opens at
357p, starts to trade down.
8.16am: (Quantity filled - 27,500) Mythica now quoted 349.5-350p. The algorithm has taken several internal crossing opportunities, and is trading in the public order book.
8.42am: (Quantity filled - 86,150) Order book activity has picked up. Until now, the algo has traded on the bid, the offer and internally.
9.52am: (Quantity filled - 192,039) Unexpected private equity losses by another investment trust push Mythica down to 345-345.5p. Trader feels it will continue to trend down so takes no action.
10.12am: (Quantity filled - 432,387) Investment trusts continue to weaken, Mythica now 341.25-341.50p. As Mythica has limited private equity participation, the trader anticipates that it will recover soon, so raises urgency setting to 4, thus increasing his participation rate in the market, while still seeking liquidity internally. The spread has also tightened to 0.25p and the algorithm identifies two larger-than-average orders on the offer and takes the opportunity to lift them before anyone else can. The stock spread then reverts to its typical 0.5p.
10.21am: (Quantity filled - 879,360) In the
preceding nine minutes, Mythica very briefly touched the 340p
completion price so the algorithm picked up substantial volume in
11.47am: (Quantity filled - 1,035,894) The algorithm continues to accrue volume from the order book in the 348-350p range.
12.17pm: (Quantity filled - 1,073,265) With lunch underway, Mythica is drifting around 349-349.25p. Minimal order book trading means the algorithm is now only accessing internal liquidity. Suddenly a sell order in Mythica is submitted, which is also unconstrained on internal crossing; both orders cross 250,000 shares at the mid - 349.125p
1.17pm: (Quantity filled - 1,336,112) Order book thin, with many traders holding back prior to US open and in anticipation of liquidity in the closing auction. The trader reduces the urgency setting, content to wait until activity picks up.
2.14pm: (Quantity filled - 1,357,222) Major oil company constituent of Mythica's large cap portfolio announces substantial find. Mythica moves quickly to 355.25-355.5p. Trader suspects rally might persist to the closing auction, so sets urgency parameter back to 4. His order still does not print, as Mythica is trading off limit.
4.13pm: (Quantity filled - 1,357,222) No activity for the last two hours due to the limit price, but Mythica starts to drift down to 349p, so the algo starts crossing internally again.
4.35pm: (Quantity filled - 1,500,000) As expected, Mythica experiences a lot of liquidity in the closing auction. Order completed. Average price 347p.