The manager is also of the opinion that asset managers in general will continue to see their fortunes improve in the medium term. On this point he sees Aviva Investors (Aviva's asset management arm) as a contender likely to benefit from this trend. This positive view has been partly influenced by the recent announcement that Aviva Investors intends to set up a regional asset management firm in Singapore and to build up its equities and fixed income investment capabilities in Asia. At present, Aviva Investors is relatively underexposed to Asia, with less than 5% of total assets under management invested in the region. Aviva Investors' Asia-Pacific CEO has also reported strong interest among existing clients in investing a larger portion of their funds in Asia.
The shares are due to go ex-dividend (15p) on March 24th and the fund manager believes that despite the positive medium term outlook there is a reasonable chance that they will overshoot this on the downside during the trading session. He therefore instructs the trading desk to acquire 1.7 million shares with a limit of 386p and an average target price for the whole position of 384.5p.
The Asset: Aviva PLC Ordinary Shares of 25p
The Challenge: To buy 1.7 million shares of Aviva with a limit price of 386p and a target average price of 384.5p during the trading session of Wednesday March 24th 2010.
The Algos: The liquidity-seeking algorithm being deployed seeks to achieve intelligent silent execution by simultaneously accessing all available sources of liquidity, both displayed and non-displayed (though the trader has the option of disabling specific venues if desired). In addition to volume limit, price limit and start/end time, the algorithm has two important user-configurable parameters:
- Urgency Level: the user can choose from a range of urgency levels that determine the speed of execution and target participation in displayed versus non-displayed markets. Values range from 1 (accessing 100% non-displayed liquidity only) to 5 (accessing all forms of liquidity with no volume participation constraint on venue type).
- Completion Price: if selected, when the stock is at or better than the completion price level indicated by the trader, the algorithm will become highly aggressive and seek to execute the entire order. In doing so, the strategy can override any volume limits and urgency levels, access all liquidity pools and attempt to complete the residual quantity irrespective of location.
Other features include:
- The ability to drive order execution relative to a benchmark or another instrument (such as a stock or index)
- An "outsized liquidity override," which allows the strategy to be selectively more opportunistic and proactive in displayed markets (for example, in small cap or thinly-traded stocks). If an opportunity arises, the algorithm immediately sends outsized IOC orders, thereby maximising interaction with the displayed quote and executing as much as possible within the other parameter.
When interacting with non-displayed liquidity, the algorithm does not access venues that allow IOIs or signalling and all orders are entered with price limits in relation to the current market conditions. The algorithm also includes additional safety checks that control the fashion in which non-displayed venues are accessed, so as to minimise risks of negative selection and gaming.
The Trader:The trader, who is based in London, works for a long-only equity fund management firm. In addition to Market Profile, she uses a range of proprietary tools that she has developed from classical technical analysis techniques. This combination provides early warning of likely exhaustion and turning points as an aid to real time algorithm selection and deployment.
7.30am: In view of the stock going ex-dividend, the trader is assuming that Aviva will gap down on the opening and probably continue to decline. Working on that assumption, she sets the algorithm's urgency parameter to 1 and enters the 386p limit price.
8.00am: As predicted, Aviva gaps down and starts to decline further. However, it is still significantly above the 386p limit price so the algorithm remains inactive. Volume completed - 0.
8.15am:The stock is still trading above the limit price, so no trading activity. Volume completed - 0.
8.22am:Aviva is now approaching 386p and continues to slide. Volume completed - 0.
8.32am:The stock has spent much of the last ten minutes in limit so the algorithm has started to acquire stock from non-displayed venues and UBS internal crossing in particular. Volume completed - 27,638.
8.45am:Aviva now trading around the 387p level, so no displayed activity. Volume completed - 27,638.
9.00am:Now rising towards 390p, no activity. Volume completed - 27,638.
9.04am:The stock has failed to hold above the Market Profile control point and one of the trader's proprietary tools (an overbought/oversold oscillator), has just dropped out of overbought territory (see Figure 2; 1 minute chart, primary market data). In anticipation of a decline back below the limit price - and in view of the small proportion of the order completed so far - the trader increases the algorithm's urgency setting to 2. Volume completed - 27,638.
9.13am:Aviva has traded intermittently in limit over the past five minutes allowing further minor acquisitions of stock. Volume completed - 36,741.
9.28am:Apart from the last minute, most trading in the past 15 minutes has been above the limit. Volume completed - 41,954.
10.00am:The market has remained above the limit for the past half hour. With two hours of the trading session already gone and less than 2.5% of the order completed, the situation is giving cause for concern. Volume completed - 41,954.
10.08am:The overall market has softened considerably, with the FTSE 100 off some 20 points in the past eight minutes (see highlighted area of analogue overlay chart in Figure 3; FTSE index in blue, Aviva in green). Aviva has also weakened and is now just back within limit. Volume completed - 66,326.
10.24am:The slide has continued and Aviva has now fallen through the bottom of the Market Profile value area (see Figure 4), so further declines are likely. Most dark venues have been relatively inactive during this period, besides a reasonably sized trade on Turquoise (dark) the algorithm has acquired most of its volume from Chi-X (lit) and the LSE. With the order less than 10% complete and with price moving in the right direction comfortably below the average target price, the trader opts to further increase the algorithm's urgency parameter to 4. Volume completed - 149,368.
10.59am:The stock has traded to and fro below the Market Profile value area for the past thirty-five minutes. The higher urgency setting on the algorithm has allowed the trader to accumulate a substantial amount of stock on the various lit venues including the LSE, Chi-X and BATS. Volume completed - 397,351.
11.14am:While still well below the limit price, Aviva has rallied back into the lower region of the Market Profile value area. The trader responds by reducing the urgency setting to 3. Volume completed - 476,259.
12.55pm:The market as a whole has been rallying steadily for the past twenty minutes, but Aviva has lagged, with a report by Standard & Poor's Equity Research weighing on the stock. The report downgrades Aviva to hold from buy and cuts the target price to 437p from 460p. S & P's Tony Silverman takes the view that: "…the opportunity for Aviva's shares to perform on the basis of IFRS profit prospects has probably passed for now, and that after the summer Aviva risks being swept up in concerns over the impact of Solvency 2 on regulatory capital." In Silverman's view, Aviva's peers without refinancing commitments will be better placed. Volume completed - 719,235.
2.07pm:Aviva has spent most of the past hour in a 2p range. The algorithm has taken advantage of this behaviour to pick price points, acquiring stock on dips in the market. Most activity has been on Chi-X (lit) but Chi-X (dark) and the primary market have also been productive venues. Volume completed - 936,698.
2:13pm:Finally the algorithm finds some substantial dark liquidity, 140,000 shares in the internal crossing pool. In view of the progress achieved so far, the trader decides to reduce the urgency setting back to 2. Volume completed - 1,082,343.
3.12pm:The trader's previous reduction of the urgency setting unfortunately coincided with a reduction in available liquidity on dark venues. As a result, the acquisition rate has slowed considerably and there is a real risk of the trade remaining incomplete at the close. However, the FTSE has started to follow the Dow lower and Aviva has just dropped below its control point. In anticipation of this downward trend continuing, the trader pushes the urgency setting to 4. Volume completed - 1,189,367.
Figure 5 - Order Progress Aviva March 24th 2010
3.15pm:The revised urgency setting pays off immediately as the FTSE continues to slide and the algorithm picks up some substantial blocks of stock on the primary market, BATS (lit) and Chi-X (lit). Volume completed - 1,390,352.
3.54pm:The acquisition rate has remained high amid generally liquid conditions in both dark and lit venues. With fewer than 90,000 shares required to complete the order, the trader moves the urgency setting back to 2. Volume completed - 1,611,036.
4.24pm:Aviva has rallied steadily if unspectacularly over the past 30 minutes. The algorithm has continued to accumulate stock below the target price with the bulk of its liquidity sourced from UBS internal crossing, but with significant success on dark venues, including SmartPool and BATS. Volume completed - 1,696,364.
4.27pm:Trade completed - 1,700,000 shares acquired. Average price achieved - 383.42p.