Handbook of Exchange Rates

21.3 Types of Algorithms

There are numerous strategies available for traders to use right now, they range in characteristics and need to be sufficiently understood before you begin applying them to your order flow. The list following contains an overview of what each style offers.

21.3.1 Time Slicers

TWAP algorithms are already used extensively and perform the basic function of minimizing spread over a predetermined time horizon.

They range from the simplest of drones executing small clips into a single or aggregated stream of prices at regular intervals through to peg and pay strategies. These will attempt to avoid paying spread by posting interest into markets while observing randomization parameters around order size and aggression timings. They work just fine for passive orders; however, their performance is generally tied to market direction, kind of like beta returns on an index portfolio. If the target interval for execution is set too aggressively, they can underperform significantly.

21.3.2 Sweeper

This type of algorithm sends a series of “fill or kill” orders out to multiple markets within a predetermined limit price. They are designed to soak up maximum liquidity within the shortest time frame possible. Typically deployed when there is an immediate need to clear risk and will very likely cause short-term disruption to the market (Figure 21.4).

Figure 21.4 Sweeper.