Source: Interactive Brokers
Interactive Brokers announces the enhancement of its ScaleTrader algorithm to encompass Pairs Trading enabling clients to trade the spread between any two securities. Investors typically buy the shares of one company and sell those in another when the distance between the two prices moves towards an extreme value and away from an observed relationship.
The Interactive Brokers ScaleTrader algorithm allows clients to create conditions under which a long position in one stock is built while simultaneously creating an offsetting short position in the other. The ScaleTrader is named because investors can "scale-in" to market weakness by setting orders to buy as the market moves lower. Similarly, sell orders can be "scaled" into when a market is rising.
The ScaleTrader algorithm can be programmed to buy the spread and subsequently take profit by selling the spread if the difference reaches predetermined levels set by the user. Orders can be entered using net share price differences or by using credit or debit ratios.
Investors can set their own parameters to determine the starting number of shares and maximum size of the position they wish to create and must determine the distance between each incremental buying price. In addition the user may vary the increment over time. The user can choose between limit orders and market-if-touched orders to start the order process.
The ScaleTrader Pair Trading algorithm is available to all 142,000 of Interactive Brokers customers through its Trader Workstation trading software at no additional charge.