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Knight applies algos to pairs trading

09 February 2010  |  1680 views  |  0 Source: Knight Capital

Knight Capital Group, Inc. (Nasdaq: NITE) today announced the introduction of algorithmic pairs trading capabilities for institutions designed to increase fulfillment rates through improved liquidity sourcing and a flexible, easy-to-use interface.

Knight's pairs trading capabilities include the following:

* Access to Knight's liquidity in addition to displayed and dark markets using FAN technology
* Intuitive, easy-to-use front end to improve the trader experience
* Flexibility for traders to easily create their own strategies
* Support for complex pairs trading strategies, including multiple combinations of single securities, inverse pairs and set-up and unwind functionality in a single pair
* Low-latency, high-volume capabilities through robust server-side architecture vs. processing via the front-end

"The market environment in 2010 is ideally positioned for pairs trading strategies," said Joseph Wald, Managing Director, Knight Direct. "After the turmoil of the last several years, investors are more interested than ever in managing risk by taking a market neutral approach while residual uncertainty remains. At the same time, merger and acquisition activity is expected to continue to rise due to a reinvigorated investment banking market, while robust issuance of preferred stocks has created more opportunities to pair preferreds with their common stock counterparts. Knight has the algorithmic pair trading technology to help institutional traders make the most of these opportunities."

Traders use pairs trading strategies to capture the spread between two or more related securities, keeping risk low by remaining market neutral. Knight has combined pairs trading capabilities with FAN, Knight's innovative aggregation technology that sweeps and posts orders simultaneously in displayed and dark markets. FAN employs smart order execution technology to adapt to real-time trade executions and re-circulate an order to destinations where trade executions are taking place.

"One of the greatest challenges in executing pairs is that the market can move away in the time it can take to find liquidity in the multiple securities included in a strategy," Mr. Wald said. "The application of FAN to pairAN toAN to pairs trading helps locate disparate liquidity quickly and anonymously, improving the likelihood that an execution can take place and those strategies can be completed to a trader's satisfaction."

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