Complex Orders and Their Types – Part 1

Many market place systems nowadays are including the support for some complex and special purpose orders. The special purpose orders can be used to implement both the alpha preserving and alpha creating algorithms. Many market places operators have different perspective on having such an option in their venues. Some of those reasons are

• Some of the algorithmic trading strategies can be implemented in a more efficient way if a special purpose order is used.
• By making use of the special purpose orders, the flow of total transaction is lowered and it results in low handling cost.
• On a comparative basis, the functionality of an algorithm is superior in case of the special purpose order than the standardized orders.
• The special purpose orders cause more liquidity in the market.
• The execution risk is removed by the special purpose orders as it offers atom level complex operations.

Pegged order

In this article we will discuss on one type of special purpose order called pegged orders. The pegged orders will have its price always linked with an external reference. For example, a market participant is buying an X for the bid of the primary market for a price of Y. When there is a change in the price of the external reference, then the pegged order will update to that price automatically. But this happens only till the price reaches the cap price of X.

The pegged orders are often used to lessen the problems that are created by the transaction flow which is an often occurring event in the algorithmic trading. Some algorithms like “make a market at least as good as the primary market” can be very easily implemented with the pegged orders. It doesn’t require any processing cost as like the other standardized order types. Another important aspect about the pegged orders is that the algorithm creators will try to find the ways in which the pegged orders can be used in the most creative way possible.

This sometimes may end up in something which was not actually expected by the marketers. Thus it is very important to track the changes that are taking place in the algorithm designing and also the parameters. The market place specific optimizations must be applied whenever needed. Also the load, which is a result of the pegged orders, must be controlled just like what happens in the case of standardized order types. Reducing the number of updates to a minimum acceptable level would do this. Also the number of active pegged orders can be limited to achieve this.

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