When Less Is More: Passive Volume Algos for Enhanced Performance

Abstract

Large aggressive orders in the market often trigger, in turn, aggressive trades from Standard Volume algos. This phenomenon leads to late aggressive trading, which is particularly predictable and detrimental to execution performance. This hard-wired feature is rarely overcome, although it could be solved simply by changing “Standard Volume” indexing to “Passive Volume” indexing. Passive volume is defined as the volume traded passively, according to the size of the transaction. According to the authors’ simulations, performances improve markedly when a Passive Volume algo is used, versus the Arrival Price as well as versus VWAP. Passive Volume algos would then be a particularly advisable alternative to Standard Volume algos on large-caps, especially for participation rates below 15% and expected trading durations longer or equivalent to 60 minutes. The same can be said for durations above 90 minutes on mid-caps.

TOPICS: Simulations, passive strategies