A participation strategy

This series looks at building a near full-scale application in q and, in the process, tries to answer questions on the amount of code a q application requires, and how that code can be organised so that it is both comprehensible and straightforward to change. The target application is a participation strategy and some of its associated testing framework.

This installment specifies the participation strategy. Previously in this series: a qx market maker. Next: the first step in implementing the strategy.

Introduction

Participation is one of basic execution strategies: trading in line line with the market. At its simplest, every trade seen in the market is responded to by sending an order to take a proportionate quantity from the opposite side (far side) of the order book, i.e. the ask side if the strategy is buying. The strategy is not a "completing" strategy: it does to aim to finish the full order quantity assigned to it, as it simply reacts to the volume traded in the market. Despite this simplicity, the participation strategy can be viewed as the foundation for many other strategies. Algorithms that have fixed quantity schedules, such as VWAP, can also be expressed as constant or variable rate participation strategies. For one reason why this may be a good thing, see this chart.

Execution

The average price achieved by the strategy would be poor if all the strategy did was take from the order book. Consequently participation strategies operate on both the far and the near side of the book, aiming to achieve an average price nearer to the volume weighted average trade price, VWAP. Below is a summary of the basic near and far execution tactics. In the text qty refers to the upstream order quantity; filled and leaves are the quantities filled and remaining; rate, minsize and maxtake are strategy parameters. From 2009-02-18: minqty was renamed minsize to avoid confusion with the equivalent FIX field.

	Far	Near
What is the primary signal for action?	Trades	Quotes
What types of order are used downstream?	IOC with limit price	Day orders with limit price
How is the quantity for the order calculated?	`rate` times volume, less `filled`, then grossed up (the executed IOC also adds to market volume)	`rate` times other quantity on nearside, grossed up, less own quantity
What are the minimum constraints on order quantity?	`minsize` to ensure orders are economically worthwhile	`minsize` to ensure orders are economically worthwhile and quote improvements in trivial size are ignored
What are the maximum constraints on order quantity?	`leaves` `maxtake` to limit proportion of total far quantity to remove from the order book and hence limit market impact	`leaves`
Which other signals can prompt action?	Quotes can prompt an order if the execution has been reduced by a maximum constraint, i.e. an increase in the far qty could cause another IOC to be sent	n/a
What happens when `minsize` is greater than `leaves`?	Reduce `minsize` to a single share/lot Increase `maxtake` to 100%.	Reduce `minsize` to a single share/lot From 2009-02-05: Place all the remaining quantity on the book

If the design (and the coding) is right, then other tactics can be added without rewriting code: for example, consider adding a third tactic ("deep") that, with a hint about the duration of the order, uses the barrier diffusion model for longer term order placement.

In keeping with the limitations in this series, the participation strategy will neglect essential features such as spread constraints, start and end times, and auction participation.

Upstream order lifecycle

New orders

Upstream orders are sent to the strategy and are executed within specification until leaves equals zero. There is no status change on completion: if the upstream order is amended to have more qty then the order can be processed again. This can be useful as it allows us to run the strategy with tranches of the original order size.

Execution is delegated to the tactics in equal allocations, each allocation being a multiple of the minsize. As the tactics work through their allocation, further allocations are made on a "just-in-time" basis. The farside tactic has priority once the last allocation is being made; if the nearside tactic is still executing whilst the farside tactic has stopped, then all the remaining quantity is reallocated to the farside tactic.

This model of the strategy acting as the allocator, and the tactics executing their allocated quantities, means that the tactics will need their own values for qty, filled, leaves and the strategy parameters.

Amendments

Aspect		Consequences
`qty`		`leaves` is recalculated. The upstream order will become executable if `leaves` is greater than zero. The effective `minsize` and `maxtake` used by each tactic are recalculated.
`rate`		Benchmark figures are reset.
`minsize`		The effective `minsize` is recalculated for each tactic.
`maxtake`		The effective `maxtake` is recalculated for the far tactic.

Cancellation

Orders that are explicitly cancelled have their qty amended down to the current value of filled and all downstream orders are cancelled.