Vice President, Electronic Sales
Mr. Kennedy: Certain pairs trading strategies have experienced growth recently. Risk arbitrage has
grown as rising interest rates prompt cash-rich companies to make deals, while statistical arbitrage
volumes are increasing due to a larger disparity of prices.
Selecting a pairs trading strategy depends on your objectives. But there are other factors to consider,
such as the parameters you set, especially when dealing with thinly traded names.
Being able to choose your urgency level is key. It allows you to place passive orders in the market prior
to the pair becoming marketable, which can put you at the front of the queue when it does. This can be
useful in deals that include illiquid names. You can also choose the posting logic of the pair’s algorithm,
to help capture spread or reduce legging risk, by only taking liquidity when your pair is in limit on the far
side of the spread.
Individual leg limit is another important input, especially when managing trades where one leg is
significantly less liquid than the other. While the illiquid leg is generally traded first, the pair’s engine
from Bank of America Merrill Lynch allows you to indicate your own trading priority.
For more actionable ideas to help optimize execution across asset classes, check out the rest of our
Trader Insights video series.