Algorithmic Trading
Equity Trading vs. Futures Trading
Morgan Stanley Institutional Securities
This material has been prepared for information purposes to support the promotion or marketing of the transaction or matters
addressed herein. It is not a solicitation of any offer to buy or sell any security, commodity or other financial instrument or to
participate in any trading strategy. This is not a research report and was not prepared by the Morgan Stanley research
department. It was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This material was not
intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed
on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular circumstances
from an independent tax advisor. Past performance is not necessarily a guide to future performance. Please see additional
important information and qualifications at the end of this material.
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What is an Algorithm?
 A pre-defined step-by-step method to accomplish a task
 A computer model that takes an order and structures a sequence of
trades that aim to achieve the stated objectives…

Minimize cost compared to a defined benchmark

Maximizing fill rate

Minimizing execution risk
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
2
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Trends Behind Algorithm Trading
Regulatory Changes
Electronification of Markets
Improve Scale & Efficiency
Desire for Anonymity
Realization that Trading Is a
Source of “Incremental Alpha”
Desire to Reduce Explicit and
Implicit Trading Costs
EQUITIES
FUTURES





–






This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
3
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Impact of Algorithms on Traders
“Algorithms are
productivity tools”
“Algorithms are just
ONE of the tools
available…”
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
4
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Trade Lifecycle
TCA
Execution
Sort
Limit Order Prog.
Crossing vs.
Liquidity Pool
Trade/Trajectory Planning
Benchmark Determination
Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
5
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Trade Lifecycle
EQUITIES
FUTURES
Execution Evaluation
Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
6
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Execution Evaluation
Spectrum of Difficulty
Significant Event
Time of Day
Size of Trade
Global Economic Events
Price
Volume
Time
Time
Volatility
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
7
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Execution Evaluation: Fit the Algorithm to the Strategy
Single Algorithms
Liquidity
Multiple Algorithms
Urgency
Trade Size
Algorithm & DMA
Algorithm & Trader
Price Limits
Application
of Constraints
Volume Limits
Time Limits
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
8
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Trade Lifecycle
EQUITIES
FUTURES
Benchmark Determination
Benchmark Determination
Execution Evaluation
Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
9
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Benchmark Determination
Trade Structure
Development
Order(s)
More Structure
Examples
Schedule Based
 VWAP
 TWAP
Less Structure
Flexible
 Volume Participation
Dynamic
 Arrival Price
 Price React
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
10
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Trade Lifecycle
EQUITIES
FUTURES
Trade/Trajectory Planning
Trade/Trajectory Planning
Benchmark Determination
Benchmark Determination
Execution Evaluation
Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
11
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Trade/Trajectory Planning
TCA
Sort

Limit Order Prog.
Crossing vs.
Liquidity Pool

Trade/Trajectory Planning

Execution Evaluation

Parameters Available
for VWAP are:
Trajectories are static from the beginning of the
trade and do not respond to changes in intraday
liquidity.
Volume distributions are determined by country
and adjusted for seasonal factors such as expiration
days, and month/quarter ends.
The BXS VWAP strategy attempts to minimize
shortfall versus VWAP as well as minimize the
market impact into achieving that price, thus
minimizing the total cost of the trade
25
120%
Number of Shares
Percent of Order
80%
15
60%
10
40%
5
20%
0
1. Price Limits
100%
20
0%
9:30 10:0010:3011:0011:3012:0012:3013:0013:3014:0014:3015:0015:3016:00
TIME
2. Duration Limits
3. Volume % Limits
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
12
% OF ORDER
Benchmark Determination
VWAP
The VWAP strategy creates a trade plan that
emulates the historic volume distribution (either
all day or interval).
# OF SHARES (thousands)
Execution
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Trade/Trajectory Planning
TCA
Execution
Limit Order Prog.
Crossing vs.
Liquidity Pool
Trade/Trajectory Planning
Benchmark Determination
Execution Evaluation
 The BXS TPOV strategy is designed to participate
with either the primary or composite volume at a
user specified rate.
 Order quantities are determined for individual time
sub intervals and scheduled for execution according
to continuously updated forecasts of volume
Target Percent of Volume
120
Market Shares
Order Shares
100
# OF SHARES (thousands)
Sort
80
60
40
20
Parameters Available
for TPOV Orders:
0
9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30 16:00
1. Price Limits
TIME
2. Duration Limits
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
13
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Trade/Trajectory Planning
Arrival Price: Low Urgency
TCA
Execution
Trade/Trajectory Planning
Benchmark Determination
Execution Evaluation
1. Urgency Level
2. Price Limits
3. Duration Limits
4. Volume % Limits
12
80%
10
60%
8
6
40%
4
20%
2
0
0%
9:30 10:00 10:30 11:00 11:30 12:00 12:30 13:00 13:30 14:00 14:30 15:00 15:30 16:00
TIME
 The BXS system determines an initial optimized
trading trajectory that controls the pace of
execution, balancing market impact with market
risk (time) based upon the level of urgency.
 Trajectory is based on continuously updated
forecasts of volatility, liquidity and spread, and
changes dynamically during execution with the
changing market conditions.
100%
14
Arrival Price: High Urgency
100
120
Number of Shares
90
Percent of Order
80
70
80
60
50
60
40
40
30
 Order quantities are determined for individual time
sub intervals and scheduled for execution.
100
20
20
10
0
0
9:30 10:0010:3011:0011:3012:0012:3013:0013:3014:0014:3015:0015:3016:00
TIME
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
14
% OF ORDER
Parameters Available
for Arrival Price
Orders:
 The trader determines a level of execution
“urgency”- get done, high, medium, or low- which
corresponds with the expected level of information
content (alpha) embedded in the order.
Percent of Order
# OF SHARES (thousands)
Crossing vs.
Liquidity Pool
16
120%
Number of Shares
% OF ORDER
Limit Order Prog.
 The BXS Arrival Price strategy is designed to
minimize execution shortfall to the midpoint of the
initial bid/ask.
# OF SHARES
Sort
18
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Trade Lifecycle
EQUITIES
FUTURES
Crossing vs.
Liquidity Pool
Crossing vs.
Liquidity Pool
Trade/Trajectory Planning
Trade/Trajectory Planning
Benchmark Determination
Benchmark Determination
Execution Evaluation
Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
15
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This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
15:50
15:40
0
15:20
0
15:10
10,000
15:00
10,000
15:50
20,000
15:40
20,000
15:30
30,000
15:20
30,000
15:10
40,000
15:00
40,000
14:50
50,000
14:40
50,000
14:30
60,000
14:20
60,000
14:10
70,000
14:00
70,000
14:50
 Sell 135,000 XYZ
14:40
 Buy 150,000 XYZ
14:30
 Target 20% of Volume
14:20
 Arrival Price Medium
14:10
SELL
14:00
BUY
15:30
Crossing vs. Liquidity Pool
16
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This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
15:40
15:30
15:20
15:10
0
15:00
0
14:50
10,000
20,000
14:40
10,000
20,000
15:50
20,000
40,000
15:40
20,000
40,000
15:30
80,000
30,000
60,000
15:20
80,000
30,000
60,000
15:10
100,000
40,000
15:00
100,000
40,000
14:50
120,000
50,000
14:40
120,000
50,000
14:30
140,000
60,000
14:20
140,000
60,000
14:10
70,000
160,000
14:00
70,000
160,000
14:30
 Target 20% of Volume
 Sell 135,000 XYZ
 “I Would” – Public or Dark
14:20
 Arrival Price Medium
 Buy 150,000 XYZ
 “I Would” – Public or Dark
14:10
SELL
14:00
BUY
15:50
Crossing vs. Liquidity Pool
17
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Trade Lifecycle
EQUITIES
FUTURES
Limit Order Prog.
Limit Order Prog.
Crossing vs.
Liquidity Pool
Crossing vs.
Liquidity Pool
Trade/Trajectory Planning
Trade/Trajectory Planning
Benchmark Determination
Benchmark Determination
Execution Evaluation
Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
18
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Limit Order Program
TCA
Execution
From Liquidity Pool
XYZ
Bid
93.38
500
Sort
Limit Order Prog.
5,000 Shares
Net Sell
Crossing vs.
Liquidity Pool
TB – TC
Orders
into
Marketplace
Trade/Trajectory Planning
Benchmark Determination
Size
500
1000
300
100
700
1500
Limit
Order Program
Execution Evaluation
• Residual Orders are sent to the Limit
Order Program
• Trades are broken down into market
size increments
• Multiple limit orders are then placed
into the market to create a
“portfolio” of orders
• Limit Orders are dynamically
managed based upon executions and
changes in market conditions
• Limit order sizes, pricing, duration
and spacing between orders change
continuously to minimize
information leakage and “footprint”
• Major factors affecting orders are
volatility, spread and liquidity
Offer
93.40
300
Last
93.39
PX
93.38
93.37
93.35
93.31
93.27
93.25
Size
300
400
200
500
1000
700
PX
93.40
93.41
93.44
93.47
93.48
93.52
XYZ
Bid
93.39
100
Size
100
500
1000
300
200
100
5,000
Shares Sell
Offer
93.42
200
Last
93.41
PX
93.39
93.38
93.37
93.35
93.34
93.31
Size
100
200
300
600
1000
900
PX
93.42
93.44
93.45
93.46
93.48
93.51
XYZ
Executions
and Market
Data
Bid
93.37
1000
Size
1000
100
300
100
1000
700
Offer
93.38
600
Last
93.38
PX
93.37
93.36
93.35
93.31
93.30
93.27
Size
600
100
500
200
600
300
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
PX
93.38
93.39
93.41
93.44
93.45
93.47
19
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Trade Lifecycle
EQUITIES
FUTURES
Sort
Sort
Limit Order Prog.
Limit Order Prog.
Crossing vs.
Liquidity Pool
Crossing vs.
Liquidity Pool
Trade/Trajectory Planning
Trade/Trajectory Planning
Benchmark Determination
Benchmark Determination
Execution Evaluation
Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
20
NSX /
CINN
ISE Stock
Exchange
CBOE
BeX
BATS
EDGX /
EDGA
TRAC /
DATA
ONTD
CHX
BTRD
PHLX
Pipeline
AMEX
NASDAQ
INET
POSIT
NYSE
Arca
SMART ORDER
ROUTING TECHNOLOGY
Liquidnet
SORT
NYFIX
Millennium
NYSE
LEH
LCX
BIDS
NASDAQ
Crossing
Network
CITI
ACE
UBS
PINS
Matchpoint
Fidelity
Cross
Stream
ITG Block
Alert
CS
Cross
Finder
GS
Sigma
X
ISE
Midpoint
Match
MS
Trajectory
Crossing
Morgan
Stanley
POOL
LeveL
Instinet
(CBX,
etc.)
ITG Now
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Smart Order Routing Technology — SORT
TCA
Execution
Sort
Limit
Order
Program
Limit Order Prog.
Crossing vs.
Liquidity Pool
Trade/Trajectory Planning
Benchmark Determination
Execution Evaluation
• SORT is the vehicle through which BXS executes limit orders
in the marketplace.
• SORT creates a consolidated order book from all available
liquidity pools.
• After the Limit Order Program determines the size and price of
an individual order, SORT determines which liquidity pool(s)
the order should be placed in.
• SORT will slice orders to access multiple liquidity pools
simultaneously.
• Major factors influencing the choice of destination include
current and historical price, liquidity and speed.
• SORT is utilized for NASDAQ as well as Listed stocks orders.
SORT
Consolidated Order Book
NYSE
AMEX
XYZ
Bid
93.38
500
Size
500
1000
300
100
700
1500
BTRD
Last
93.39
PX
93.38
93.37
93.35
93.31
93.27
93.25
Offer
93.40
300
Size
300
500
200
400
1000
700
PX
93.40
93.41
93.44
93.47
93.48
93.52
ITS/
CAES
SUPER
MONTAGE
INCA
ISLD
BRUT
ARCA
• Additional Smart Order Routers include SORTETF for
Exchange Traded Funds and OSORT for listed equity options.
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
22
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Trade Lifecycle
EQUITIES
FUTURES
Execution
Execution
Sort
Sort
Limit Order Prog.
Limit Order Prog.
Crossing vs.
Liquidity Pool
Crossing vs.
Liquidity Pool
Trade/Trajectory Planning
Trade/Trajectory Planning
Benchmark Determination
Benchmark Determination
Execution Evaluation
Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
23
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Trade Lifecycle
EQUITIES
FUTURES
TCA
TCA
Execution
Execution
Sort
Sort
Limit Order Prog.
Limit Order Prog.
Crossing vs.
Liquidity Pool
Crossing vs.
Liquidity Pool
Trade/Trajectory Planning
Trade/Trajectory Planning
Benchmark Determination
Benchmark Determination
Execution Evaluation
Execution Evaluation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
24
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Post Trade
(Performance by Desk or Trader)
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
25
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Development of Algorithms for Futures: The 80/20 Rule
Expiration
20 %
Accelerate the
Development of
Predictive Models for
Futures Using Existing
Models
80 %
Economic News/Events
Cash Market Events
Extension of the Equity
Model Foundation
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
26
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What’s Next
Cross Asset
Correlation
Control Behavior
 Define your own algorithm
BLACK BOX
 Act like a sales trader
This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in
any trading strategy. This material was not prepared by the Morgan Stanley research department. Please refer to
important information and qualifications at the end of this material.
27
Algorithmic Trading
Equity Trading vs. Futures Trading
Morgan Stanley Institutional Securities
This material has been prepared for information purposes to support the promotion or marketing of the transaction or matters
addressed herein. It is not a solicitation of any offer to buy or sell any security, commodity or other financial instrument or to
participate in any trading strategy. This is not a research report and was not prepared by the Morgan Stanley research
department. It was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This material was not
intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed
on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular circumstances
from an independent tax advisor. Past performance is not necessarily a guide to future performance. Please see additional
important information and qualifications at the end of this material.