The Gateway to Algorithmic and Automated Trading

Auto ADRs

Published in Automated Trader Magazine Issue 26 Q3 2012

Certain mandate restrictions can hugely increase frictional costs for asset managers. A classic example is where US managers can only hold ADRs as opposed to directly holding foreign stocks, and have historically been hit hard by instrument conversion costs and FX dealing spreads. Joseph Wald, Managing Director at Knight Capital Group, shows how multi asset algorithmic execution can massively reduce these costs.

Joseph Wald

Joseph Wald

The Scenario : It is the afternoon of Tuesday April 10, 2012. The portfolio manager of a New York based asset management firm has been tracking the performance of Nokia with increasing concern since taking a 10 million share position in December 2011. The position was acquired for an average price of $4.59 (close to Nokia's low for 2011) by taking advantage of the stock's decline on the back of bearish brokers notes and a sympathetic slide with Research In Motion's posting of a sharp profit drop. As a result, while the position is currently trading at a profit, the manager feels that much is wrong with the company and that it has been strategically drifting for too long.

The Asset : Nokia The Challenge: To sell 10 million shares in Nokia during the next three trading sessions with a limit of $4.60. Even over three sessions, the volume alone is demanding because Nokia's average daily volume during US trading hours over the past year has been around 32 million shares. The price limit may prove similarly demanding, because while the price running into the close on April 10 is fluctuation around $5, underlying sentiment is fickle and a further piece of bad news from the company could trigger a sharp decline.

The Trader : The trader heads the asset manager's in-house execution desk in New York and in view of the trade's complexity and demanding nature, he elects to handle it himself.

The Algo : The algorithm used for the trade is perhaps more accurately described as a sophisticated trade workflow process that combines stock execution using any one of the broker's algorithms with simultaneous FX translation using the broker's own FX liquidity pool. It works as follows....

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