Imported from previous forum
[ original email was from jim whitehead - jwhitehead@latentzero.com ]
Good Afternoon
A quick question regarding TIFs and algos. My own experience has been predominantly with algos which are only used during the space of a single trading day. Many brokers have optional start/end time parameters,which, if not used default to ‘start now’ and ‘stop at the close of the market that the stock trades in’.
I’m not quite sure how appropriate every algo is for trading TIFs such as Good Until Date (GTD) or Good Until Cancelled (GTC), however some of the more passive, liquidity seeking strategies would seem to lend themselves to that kind of TIF.
In that situation is it appropriate for the TIF to effectively override the start/end time or should there be an ability to set a start and stop time and date? If its the latter, if the strategy selected is requested to end before a GTC is cancelled or before the specified date on a GTD, what should the default behaviour be on the remaining life of the order, should it revert to a care desk, be cancelled back, some other option?
Thanks in advance for any wisdom you can impart
Jim,
I’m sorry but I’m not familiar with TIFs so I’m flying a bit blind here.
Start time and end time have been subjects of lengthy discussions at the algo WG. It’s a sticky area when the OMS is in one time zone, (either physically or via something like a Citrix connection), and the market is in another. (what is the local date, the market dates, MOC timing, etc. )
Plus the whole subject of holidays, early closings, closings during a presidential speech, circuit breaker pops closings, market down due to internal technical trouble or lengthy delay, etc. are all somewhat of a nightmare when arriving at a clear communication of how long will this algo remain active in the market, and what, if anything, will kick it out?
One other issue is the day-by-day nature of brokerage accounting. Even if the “front end” trading systems can accommodate multi day periods sometimes the transaction accounting systems that are one step back can’t handle them. The accounting side of broker transaction processing seems almost universally “batch” oriented around a trading day, vs. anything near continuous. Cash posting to the traders account (real FedFunds cash) occurs on settlement, not trade, and all dividends and interest post to the account through systems that were largely developed under the bank regulation side, vs the broker regulation side. All the margin regulatory rules have a “day” concept built into them too.
FIX itself is guilty of having some “day” bias still left in it. When it was developed, there was no “after hours” trading. For example, with each order ClOrdID (client order identifier) must be sent. Here is the doc for that tag:
“Unique identifier of the order as assigned by institution or by the intermediary (CIV term, not a hub/service bureau) with closest association with the investor. “
“Unique identifier for Order as assigned by the buy-side (institution, broker, intermediary etc.) (identified by SenderCompID (49) or OnBehalfOfCompID (5) as appropriate). Uniqueness must be guaranteed within a single trading day. Firms, particularly those which electronically submit multi-day orders, trade globally or throughout market close periods, should ensure uniqueness across days, for example by embedding a date within the ClOrdID field.”
As you can see, things get sticky around even the concept of a day – “particularly those which electronically submit multi-day orders, trade globally or throughout market close periods, should ensure uniqueness” – and that’s just the tip of the iceburg.
As for terminating an algo early the algo WG greatly favors the cancel/replace methodology. Inside FIXatdl every parameter carries an attribute “Mutable On Cancel / Replace”. If that is marked true, then the algo maker is willing to entertain a cancel/replace instruction involving a change to that particular parameter.
I’ll be the first to admit, one of the best features of an algo is eliminating latency. A buy side trader located “far, far away” can touch off an algo that will execute on a co-located server located 50 feet away from the exchange backbone. After the algo starts, that trader is on equally footing (latency wise) to a local trader. However, he is not on an equal footing for cancel/replace.
Lastly, for the foreseeable future there will be some very rough spots around date/timing issues for algo executions. The problems are very complex (particularly when you factor in the systems down stream from trading involved in clearance, custody, accounting, reporting, regulation, etc). Anyone that read that Options Clearing Corporation (OCC) Disclosure Document knows that time/date issues require full disclosure, otherwise misunderstandings occur and that’s when everything lands in arbitration.
My advice for algo makers to do their very best to protect the interest of there algo user base. And FULLY DISCLOSE EVERTHING they know about timing/date issues in the disclosure document. Inside the xml file, for every algo strategy that is described therein, there is attribute called disclosureDoc which is a URL for the disclosure document supplied by the algorithm provider. A full and frank discussion of known timing/date issues in that document is the very best way to avoid future misunderstandings how the algo operates past market closes, across days, how the time zones work, what is available and not available in cancel/replace, how the “best efforts” works on algos that are already in high speed execution mode, etc.
More on the suggested formats for the disclosureDoc below. Sorry about the formatting here. If anyone wants an easier to read .doc version just let me know and I’ll send it.
Rick
Strategy Disclosure Outline
Concept: Create a suggested outline for a semi formal Strategy Disclosure Document that would provide essential disclosures to traders about using the strategy in the real world. I.e. it covers cover the risks, limitations, potential problems up-front, so the customer has the opportunity to know the risks and benefits up front and has the ability to heed warning or ignore them at their sole risk. Traders therefore can’t come back later and say “well I didn’t know…”
The Strategy Disclosure document would not be part of the XML file. The only thing the xml file contains is a URI to the document. FIXatdl doesn’t monitor compliance to his outline, however it publishes this outline as the reference for disclosure structure and general contents.
The outline is modeled roughly after the style and presentation format of the “Prescription Drug Information” disclosure required for drugs that was updated after considerable research in 2006. (see appendix). It therefore benefits from the considerable body of research that has gone into that basic format which is used in a surprisingly similar, generally risky environment.
Goals:
· Enable a wide range of market professionals to learn about implementing the specific algo strategy
· Easy-to-read format. Easily understood, easily accessible and is designed to be easily memorable.
· Helps manage risk and reduce errors.
· Designed to draw a market professional’s attention to the most important parameters before an order is entered.
· Reduced GUI order clutter and confusion by moving warnings and standard, non-dynamic messages off trading screens, thereby allowing the GUI to be maximally user friendly to market professionals during frequent and sustained use. Preserves screen “real estate”.
· Provides clear, plan language, up-to-date information.
· Provides the disclosure in a single, authorized, and well-known location
· Provides an easy to use, but standardized and proscribed format. Algo providers are thereby relieved from performing other disclosure obligations and maximum economy is permitted.
· Insures a defined content structure that allows all readers (and all electronic systems) to benefit from the standard outline structure. The rest is just free text, graphics, etc.
· Presents the most important information in a disciplined, prioritized and an up-front manor.
· Presents more esoteric but necessarily details after the summary, also a structured format.
· Prevents adverse events from occurring due to potentially confusing technical information
· Assists market professionals in communicating the risks and benefits of the specific order type to non-professional investment clients.
We have hit a point of information overload and the message is being diluted. This problem is compounded by information that reads more like legal disclaimers than useful or actionable information
- Quote regarding the 2006 drug disclosure research findings
Nothing in this effort suggests that these disclosure documents must be shared with anyone other than the customers and prospects the algo maker chooses to do business with. The only requirement is that the same disclosure document be used with all customers or prospects of that particular version of the algo strategy, without exception. The document at the end of the URI contained in FIXatdl xml file may be subject to full authentication, pre-signed non-compete/non-disclose/non-reverse-engineering agreements, etc. Nothing at FIX mandates that the disclosure document be made available to everyone, only those who are fully authorized by them to use the strategy.
No price, commission, rate or fee amounts are contained in the disclosure document so vendors retain maximum marketplace flexibility.
Disclosure Outline for FIXatdl Algorithmic Orders
Page One - Highlights - provides immediate access to the most important algo usage information including benefits and risks in a prioritized and summarized format. Typically, is should be about a half a page in length
· Product Names, trademarks, other - brief specific identification information, non-disclosure, non-reverse engineering disclosures and requirements, if applicable.
· Major Warnings - Limited to the most major warnings only. Very terse. May also be repeated on the GUI itself
· Recent Major Changes
· Maturity – very brief but accurate information on the product stage in lifecycle. How new is this?
o Dates for beta, limited actual trials, and/or official product roll out
o Brief but useful disclosure of overall maturity of the algo strategy in the actual marketplace, such as:
§ Number of orders of this strategy successfully processed to date of the disclosure document
§ Number of entities who have successfully used this strategy type, moths or years of use
§ Additional information on the orders entered vs. successfully executed, etc.
· General Usage Highlights – when, and when not to, use this strategy; what it seeks to accomplish
· Entry and Execution Highlights- “must know” highlights.
· Sensitive Parameters Highlights- particularly if any specific parameter leverages or multiplies certain effects, or if any order parameter is particularly sensitive to what is entered. For example “Execute immediately.”
· Contraindications Highlights - Don’t enter this order if … (Perhaps certain market conditions or timings that cause unexpected results.)
· Warnings and Precautions Highlights – Prioritized highlights with reference to specific full disclosures.
· Adverse Outcomes Highlights - list any known adverse outcomes that are significant with references to full disclosures.
· Interactions Highlights - list any known interactions other order types offered only by the same vendor. (Example if this algo is in-process and another PM at your firm enters orders on the other side, it will cross the orders….) Across algo vendors however, you are “on your own” to determine all interactions.
· Specific User Issues Highlights - are there any geographic region, specific market or specific investor type known ramifications? List any and know major issues, including unusual tax or regulatory consequences. Provide suitability guidelines if necessary depending on marketing and anticipated remarketing uses.
· Reporting – Provide a specific and easy to use reporting mechanism for suspected or actual adverse or unanticipated events. Encourage widespread and immediate feedback.
· Table of Contents
Full Information Section – Items 1-8 are as above only with more compressive coverage. The rest of the items are new.
Warnings – repeat major warnings a second time
- General Usage
- Entry and Execution
- Sensitive Parameters
- Contraindications
- Warnings and Precautions
- Adverse Outcomes
- Interactions
- Specific User Issues
- Abuse and Regulatory Limits – Cover any known way to abuse the order from the prospective of the algo provider, or other external regulatory body. For instance, is the order allowed from registered market makers, during circuit breaker outages, etc.? Also cover any potential conflict of interest disclosure such as the vendor being a principal in any part of the trade.
- Recovery from Entry Error/Terminate Early – Very specific procedures for what can and cannot be accomplished after the order is first submitted.
- Technical Description – Brief, specific and technically accurate description.
- Technical Background – Without giving away the contents of the black box where the contents is considered proprietary - the theory or science behind the algo strategy including composition, uses, and effects. Characteristics or properties of this order type, especially those that make it effective in the marketplace. Full, fair and “heavy” technical discussion goes here if it can be disclosed.
- Known Technical Issues – List any known but rare event that cause the strategy to have technical issues. What happens out on the probability tails? Any known Value at Risk (VaR) implications, particularly during execution?
- Independent Research – List any formal and unbiased research covering the use of this order type. Can also be used for testimonials provided they are fact based, used with permission and include a full name, title, and firm name
- References – use for background information, academic research, marketing materials, broker fact sheets, etc.
- Optional Retail Information –This section is designed to help market professionals communicate to non-market professionals (including the ultimate owner of the assets being traded) the uses and limitations of this specific algo strategy. Expression should be in basic, plain language to the fullest extent possible. This disclosure has the side benefit of helping to educate market professionals who may be inexperienced with this algo strategy. If any regulatory body requires written disclosure regarding the use of this type strategy, and has proscribed specific language; or the algo provider desires to express specific disclosure language, include that approved language here.
- Technical Appendix – full technical detail, if disclosed, on things such as:
a. XML file documentation
b. Sequence charts
c. Order life and states diagram
d. Error Handling
e. Error Messages and status information
f. Other relevant technical information
Appendix I - FDA Outline of Prescribing Information Disclosure Document as Revised in 2006
Highlights of Prescribing Information
Product Names, Other Required Information
Boxed Warning
Recent Major Changes
Indications and Usage
Dosage and Administration
Dosage Forms and Strengths
Contraindications
Warnings and Precautions
Adverse Reactions
Drug Interactions
Use in Specific Populations
Full Prescribing Information: Contents
Full Prescribing Information
· Boxed Warning
· Indications and Usage
· Dosage and Administration
· Dosage Forms and Strengths
· Contraindications
· Warnings and Precautions
· Adverse Reactions
· Drug Interaction
· Use in Specific Populations
· Drug Abuse and Dependence
· Overdosage
· Description
· Clinical Pharmacology
· Nonclinical Toxicology
· Clinical Studies
· References
· How Supplied/Storage and Handling
· Patient Counseling Information