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Ivy Schmerken
Ivy Schmerken
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Algos for Active Traders

Fidelity Investments is offering two algorithmic trading strategiesto its most active trader clients, placing them on a more level playing field with institutions.

Retail investors, who may have felt left out of the algorithmic trading game, can now get access to institutional grade trading strategies from Fidelity Investments, according to the brokerage firm.

Yesterday, Fidelity, the Boston-based brokerage giant, said eligible retail investors using its Active Trader Pro platform could take advantage of two trading algorithms originally designed for institutional clients — namely Volume Average Price (VWAP) and Target Volume (TVOL) algorithms— to help them navigate the volatile market.

The idea is that retail investors could use the algorithms to break up large orders by executing them throughout the day, rather than submitted all at once, which would incur market impact.

“Algorithms are computer programs that execute large orders over time with the goal of optimizing execution costs and managing risk,” stated Derrick Chan, VP of financial engineering and electronic trading at Fidelity in the release.

The VWAP strategy is meant to deliver the average volume-weighted price from time of entry to the end of the trading day, explains Fidelity’s Chan, which the firm said is similar to investors using dollar-cost averaging strategies when investing longer-term in mutual funds or in their workplace retirement accounts.

With the TVOL algo, though similar to VWAP, investors gain more control over the pace at which their order is executed in the market by choosing a target participation rate of 5, 10 or 20 percent of the volume.

Investors using the two strategies will also gain access to Fidelity’s huge natural liquidity network, one of the largest liquidity networks in the industry, which connects with more than 45 domestic market venues which it evaluates for best price and execution speed.

The moves by Fidelity go along way toward leveling the playing field for retail investors who are active traders. While active traders already have direct-market access trading, the algorithms offer them the flexibility to trade more patiently, notes Fidelity’s Chan, who claims, “they can save on both spread and market impact costs.”

Though users of VWAP and TVOL algos would execute trades in multiple steps, investors will pay Fidelity’s single $7.95 online domestic equity commission, the company points out. Also, retail investors will be leveraging Fidelity’s infrastructure – high-speed networks and smart order routers and access to dark liquidity.

However, Fidelity is not offering institutional-style algo trading to all of its active traders. To qualify for algo trading, the Active Trader Pro customer must live in a household whose active trading activity is 120 or more trades a year, which means they would receive streaming news, streaming Level II quotes, streaming interactive charting, times and sales data and directed trading. Though someone who executes 36 or more trades a year would qualify for Active Trader Pro— and someone who generates 72 trades a year would receive streaming watch lists and static Level II quotes —both would still not qualify for algo trading, according to Fidelity’s criteria.

While not all retail investors are trading 120 times a year, those who meet the criteria now have a shot at competing in the highly fragmented, super fast U.S. equity-market structure. It will be interesting to see if Fidelity expands the algorithmic offering to less sophisticated customers, and whether its competitors at Schwab, E*Trade and TD Ameritrade, follow in its footsteps.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio
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