EQ ETS Algorithmic Trading Guide Europe Markets

J.P.
Morgan Private Bank Algorithmic Trading Guide

(European Markets)
August 2018
J.P. Morgan Private Bank Algorithmic Trading Guide (European Markets)
J. P. Morgan
Algorithmic Trading
Efficient execution and liquidity access through a wide variety of sophisticated,

customisable algorithms.
J.P. Morgan is committed to providing global access, excellent service and quantitative
content to our clients. A consultative approach to electronic trading enables us to partner
with clients, understand their needs and deliver tailored solutions. Our global suite of
algorithms, analytics, trading research and liquidity products is designed to combine and
cover the breadth of our clients’ requirements.
J.P. Morgan focusses on four core competencies:
Transparency
• We are open with our clients
Quantitative Approach
• We employ a disciplined, research-driven approach to product innovation
and delivery
Operational Excellence
• We strive to build and maintain the best, most efficient systems and operations
Exceptional Client Service

• We focus on the customer
2
J. P. Morgan
Algorithmic Trading
Efficient execution and liquidity access through a wide variety of sophisticated,

customisable algorithms.
The J.P. Morgan suite of algorithms deliver model driven, optimal behaviour with
benchmark targets. Clients can target VWAP, TWAP, arrival/strike and Close using different
algorithms. Tactical strategies such as “Peg” and “Iceberg” (described in more detail in this
document) allow more targeted behaviour when required.
The J.P. Morgan flagship liquidity algorithm, Aqua, combines a host of favourable attributes
of the whole suite. It trades an optimised trade schedule using a participation based
strategy while taking full advantage of dark order placement and well-priced lit
opportunities. It includes proprietary quantitative models to manage market impact and
opportunity risk, while striving to prevent dark crossing at inopportune times.
3
Model Driven Trading
AQUA CLOSE ICEBERG IS LADDER PEG POV TWAP VWAP
Through a range of sophisticated global algorithms J. P. Morgan offers market leading

execution services to our clients and internal trading desks. The underlying
quantitative models are constantly evolved based on performance analysis, including
many personalised custom algorithms.
• Centralised Optimisation Model: The model evaluates market impact cost and timing risk to
determine trading rates throughout the order. Combining lit and dark trading, the Centralised
Optimisation Optimisation Model is utilised by AQUA to forecast likely fill sizes in dark to reduce lit trading and
& Scheduling therefore market impact.
• Fair Value Model (FVM): Stock over-or under-performance is assessed against a stock specific
index to identify value and hence optimal trading times, with signals to trade based on an
assumption of reversion to the market price. Signals are used by the Signal Based Scheduling to
determine trade timing and in lit and dark opportunistic models to take advantage of good value
prices.
• Signal Based Scheduling (SBS): SBS allocates volume within the specified schedule with trading
urgency dependent on schedule position and Fair Value Signals on price favourability.
Lit Order
• Limit Order Placement Model (LOPM): The LOPM determines whether to trade passively or
Placement aggressively on the order book based on current position within schedule, order book imbalance,
snapshot momentum and spread. Orders across price levels are placed within the limit price to
ensure queue priority when the price moves favorably.
• Lit Opportunistic: Additional liquidity is taken in lit markets when there is sufficient volume on
the far touch coupled with a tight spread and Fair Value Model signals of underperformance.
• Quant Post: Child orders with a passive limit price are posted to venues based on predictions of
queue length and speed to maximise fill potential.
Routing Logic • Time on Target: Child orders with an aggressive limit price are staggered when sent to multiple
exchanges ensuring simultaneous arrival to minimise signaling to the market.
• Dark Order Placement Model (DOPM): Dark trading venues are selected based on historical fill
probability, with other venues explored continuously for unexpected liquidity. Trading is only
undertaken in dark when signals from the FVM show the stock is not overpriced.
• Dynamic Minimum Quantity (DMQ): Information exposure is protected by reducing the number
of executions of sub optimal size by foregoing a small amount of poor quality liquidity. DMQ
Dark Placement adjusts based on FVM signals on stock value and trade sizes to capture the largest amount of
liquidity in a reduced number of trades.
• Conditional Orders A non-firm order for the remaining parent size is simultaneously placed in all
qualifying dark venues alongside child orders. When confirmation of a counterparty is received all
child orders are cancelled and the conditional order is executed, minimising market impact.
• JPSI: J. P. Morgan’s systematic internaliser offers a controlled environment to source large blocks
of liquidity, reducing market impact while achieving advantageous prices using FVM.
4
AQUA
Our flagship liquidity seeking algorithm intelligently finds high quality, price favourable
liquidity by combining model driven lit, dark and opportunistic trading.
Strategy Behaviour
• Aqua unifies the J.P. Morgan suite of dark and lit quantitative models to optimise placement
across all sources of liquidity.
• The Centralised Optimisation Model estimates an expected volume to be traded in dark by the
Dark Order Placement Model using Dynamic Minimum Fill protection, while the Lit Order
Placement Model and Signal Based Scheduling trade the residual simultaneously in lit venues.
• The Fair Value Model determines the local value of the stock, aggressing on lit venues when stock
is cheap. This only happens when there is sufficient size and tightness of spread to execute.
Dark Order
Lit Scheduling
Placement
Signal Based Scheduling
Dynamic Minimum
Quant Post
Fill Quantity
Time on Target
Conditional Orders
Aqua Central Optimisation Model
Lit Opportunistic Fair Value Model

Liquidity Model Core model used in all
behaviours
Aqua uses a combination of a wide universe of quantitative models. The Fair Value Model is used in all three behaviours.
Urgency Expected Lit Passive-Aggressive Average Dark

Participation Ratio % in Lit Crossing
LOW 0-10% 62% 79%
MEDIUM 10-20% 58% 61%
HIGH 33-100% 38% 32%
Minimum and maximum percentages are indicative only. For example with less liquid names the algorithm may execute at
higher fractions of the traded volume.
5
AQUA (continued)
Considerations
• For each urgency level participation levels in lit are fully customisable in-house.
Market Impact Control for Higher Urgency Trading
• The high volume participation rates of Higher Urgency (High and Get Done) trading can
potentially cause unforeseen price movements. Users should assess market conditions
before deciding whether a Higher Urgency setting is appropriate.
• Lit participation is capped at 50% for orders submitted without limit prices in order to
restrict price impact of Higher Urgency orders.
Parameter Name Type Default Mandatory parameter? Comments

Urgency Text “Medium” Yes "Low" or "1",
"Medium" or "2",
"High" or "3"
Limit Price Number
Maximum Percentage of Percent 50 Orders will be subject to a max of 50% of
Volume Volume. Order submitted for this parameter
higher than 50% will be rejected.
Would Price Number
Start Time* Default to “now” or “start of trading section” (whichever later), no other values supported.
End Time* Default to “End of trading section” of respective exchanges, no other values supported.
* Clients may have these fields (or other fields) available on their OMS as editable. However, parameters not listed above as
supported will not be handled.
6
CLOSE
This strategy targets the close price. The Close Algorithm attempts to trade the order in
the closing auction, with any excess volume traded leading up to the auction. Indicative
auction volumes are monitored to trade as much as possible up to the order limits.
Strategy Behaviour
• The amount to trade in the close is calculated using a forecast of the closing auction size and
the user specified Max Auction %.
• If the client allows, any volume to be traded outside of the closing auction is traded directly
before the close, starting at the calculated time required to trade this excess before the close
(if possible).
• The algorithm will place the order size up to the Max Auction (%) of the indicative close volume
in the closing auction.
Allocation Process
The size of the Any excess is If calculated start During the closing
close is estimated allocated to trade time is before auction, if the
and using the Max VWAP leading up to current time then indicative volume
Auction (%) a the close; the start excess volume not indicates larger than
portion of the time is calculated expected to trade is estimated size,
order is allocated using the target reconsidered excess volume not
to trade in the continuous trade during the closing expected to trade is
close. rate. auction. placed in the auction.
Volume Profile
Market
Volume
Algo
Time
7
CLOSE (continued)
Key Considerations
• A large order may cause deviation from the close price due to pre-close trading.
• Close auction size is volatile so orders risk not getting done due to Max Auction (%) is set without
trading before the auction.
• Limit price for volume placed in the auction tracks the indicative price up to the limit tolerance to
achieve best price possible.
Limit Price Number

Urgency Text “Medium” "Low" or "1",
"Medium" or "2",
"High" or "3",
Only Trade at Close Y/N No
8
ICEBERG
An algorithm used across exchanges to automatically execute large orders with reduced
market impact. The synthetic iceberg is created by repeatedly reloading child orders at
the same price after the previous one fully fills. Child orders are smart routed across
multiple venues providing a key advantage over native icebergs.
Strategy Behaviour
• Either an automatically calculated appropriate display size or user specified size is placed in the
market and reloaded when the liquidity is taken.
• Provides a constant market presence within a predefined price level until fully filled.
• Customised aggression based on limit price.
Example Order Book

Non-displayed Displayed Displayed
Buyer Liquidity Buyer Liquidity Seller Liquidity
Bid Ask
Example Order Book
Display size
5,000 shown to
shares market
Remaining
1,395,000 order size ready
shares to refill but is
not visible on
the orderbook
9
ICEBERG (continued)
Key Considerations
• Scope for allocation across multiple exchanges to reduce quantities on individual exchanges.
• Participation level is unpredictable.
• May not execute whole of order if there is low liquidity. Equally may fill early in the trading
window if volumes are high.
• Does not offer exchange native queue priority on the non-displayed quantity but does allow any
display size regardless of exchange specific settings.
• Algorithm should not be used for opening or closing auction.

Limit Price Number Yes
Refill Size Number
Display Size Number
Participate on Open* Default to “No”, no other values supported.
Participate on Close* Default to “No”, no other values supported.
Private Bank Equity Desk Annotation:

Possibility to use DMA instead of Iceberg (Places display size shown in market)
10
IS
The IS algorithm minimises the combination of market impact cost and the risk of the
market moving away from the benchmark price. Higher urgencies trade faster at the
start of the order to maximise liquidity capture at the current price whereas a low
urgency will prioritise minimising market impact and take on more timing risk by
trading over a longer duration.
Strategy Behaviour
• Front-loads the trading schedule to target the arrival price in the market.
• Urgency level in the market can also be determined by the price relative to a user specified
level, with either aggressive-in-the-money or passive in-the-money views.
100%
90%
% Order Complete
80%
70%
60%
50%
40%
Bin 1
Bin 2
Bin 3
Bin 4
Bin 5
Bin 6
Bin 7
Bin 8
Bin 9
Bin 10
Bin 11
Bin 12
Bin 13
Bin 14
Bin 15
Bin 16
Bin 17
Bin 18
Bin 19
Bin 20
Low Medium High
Example trading trajectories for different urgency levels. “Bins” are sections of the day with equal amounts of volume
traded: the bins are short during high volume periods of the day and long during quiet periods.
11
IS (continued)
Key Considerations
• Trading schedule is highly affected by urgency level.
• If market moves in your favour, timing risk will capture alpha rather than contribute to cost and a
more passive strategy might perform better.
Limit Price Number

Urgency Text “Medium” "Low" or "1",
"Medium" or "2",
"High" or "3"
Strike Price Number
Price Adaptation Text "None" "None" or "AIM" or "PIM"
Would Price Number
Benchmark Text "Arrival" "Arrival" or "Open" or "PrevClose" or
"UserStrike"
Private Bank Equity Desk Annotation:

Possibility to use AQUA algorithm instead of IS.
12
LADDER
An adaptation of the POV algorithm, this strategy adjusts participation levels depending
on the price. Instead of just a limit price there is a ‘ladder’ of participation levels as the
price changes.
Strategy Behaviour
• Based on a POV algorithm with adaptations for price variation.
• As the price transitions through user specified levels the participation rate changes to user
specified values.
• Enables aggressive- or passive-in-the money views to be accommodated.
Example Order Book

Price POV
433.0
432.5
10% Default
Rate
Second
432.0
Trigger
Price
431.0
Second
430.5
20% Rate
Third
430.0
Trigger
Price Third
429.5
30% Rate
Ask Bid
Example Order Book with quantity on bid (yellow) and ask (blue) shown.
Example Price Bands

438
436
434
432
Price
430
428
426
424
8:00
9:00
13:00
15:00
11:00
12:00
14:00
16:00
10:00
10% POV 20% POV 30% POV
13
LADDER (continued)
Key Considerations
• Less straightforward to track participation rate when compared to the POV algorithm due to
adaptive market sensitive participation.
• Participation level is determined by the user specified price level.
Limit Price Number

Base Rate Percent Yes
Second Step Price Number
Second Step Rate Percent Max Rate capped at 50%
Third Step Price Number
Third Step Rate Percent Max Rate capped at 50%
Would Price Number
14
PEG
A passive algorithm which places orders on the near side of the order book to collect the
spread when other market participants aggress. The Peg algorithm is suitable for
clients who wish to take advantage of spread capture with no urgency to fill.
Strategy Behaviour
• Places orders of either an algorithm calculated appropriate size or user specified size passively;
the spread is never crossed.
• In-built anti-gaming controls only allow placing at prices where material volume has been
present for at least an expected duration.
• A very passive strategy with unpredictable participation rate.
Example Order Book

Price
83.23
Far touch
83.20 - Ask
83.17
High 83.14 Mid

Urgency for
a buy order 83.11
determines
posting Medium Near touch + 1 tick
83.09
price Low 83.08 - Bid
Near touch
83.05
Bid Ask
Example Order Book with quantity on bid (yellow) and ask (blue) shown.
Order Placement by Urgency

Order Low Medium High
Buy Bid Bid + 1 tick Mid
Sell Ask Ask -1 tick Mid
15
PEG (continued)
Key Considerations
• If market moves unfavourably, spread capture may not exceed losses from price movements.
• A “Would” should be set to benefit from advantageous prices.
Limit Price Number

Urgency Text “Low” "Low" or "1",
"Medium" or "2",
"High" or "3"
Display Size Number

Would Price Number
Participate on Open Default to “No”, no other values supported.
Participate on Close Default to “No”, no other values supported.
16
POV
POV is a widely-used strategy that trades in-line with market volumes to complete the
order while limiting market impact. This dynamic algorithm trades a user specified
percentage of real-time traded volumes.
Strategy Behaviour
• Passive or aggressive based on participation rate allows management of impact and risk.
• POV incorporates market events, participating in all liquidity generated by other market
participants.
• Works for liquid and illiquid stocks as automatically accounts for high or low volumes.
Example volumes which 30% POV tracks
Close
0
00
0
0
30
:30
:30
0
0
0
:30
:30
:30
:30
9:0
:0
:0
9:3
8:0
:0
:0
:0
:0
8:3
11:
11:
13
15
13
15
10
12
14
16
10
12
14
15
30% Traded Volume Market Volume
Example volumes which 30% POV tracks

Close
0
00
0
0
30
:30
:30
0
0
0
:30
:30
:30
:30
9:0
:0
:0
9:3
8:0
:0
:0
:0
:0
8:3
11:
11:
13
15
13
15
10
12
14
16
10
12
14
15
17
POV (continued)
Key Considerations
• If market moves unfavourably, spread capture may not exceed losses from price movements.
• A “Would” should be set to benefit from advantageous prices.
Target Percentage of Percent Yes Orders will be subject to a max of 50% of

Limit Price Number

Would Price Number
Participate on Open Y/N
18
TWAP
A strategy suited to clients who want to trade evenly over the day. TWAP will trade
linearly throughout the day with micro-order placement modelled quantitatively to
trade passively when possible.
Strategy Behaviour
• Enables trading of balanced baskets keeping them neutral throughout the trade.
• Typically a passive strategy used for low participation rate orders.
• Limit Order Placement Model (LOPM) and Signal Based Scheduling (SBS) ensure optimal
execution along the volume profile.
• Appropriate for stocks with unpredictable volume profiles such as small caps or ETFs.
Example volume profile

per fifteen minute “bin” which TWAP tracks
Close
0
00
0
0
30
:30
:30
0
0
0
:30
:30
:30
:30
9:0
:0
:0
9:3
8:0
:0
:0
:0
:0
8:3
11:
11:
13
15
13
15
10
12
14
16
10
12
14
15
Example cumulative volume profile

Close
0
00
0
0
30
:30
:30
0
0
0
:30
:30
:30
:30
9:0
:0
:0
9:3
8:0
:0
:0
:0
:0
8:3
11:
11:
13
15
13
15
10
12
14
16
10
12
14
15
Target Profile Lower Urgency Higher Urgency
19
TWAP (continued)
Key Considerations
• Liquidity may be missed by ignoring unpredictable volume spikes.
• Trade size as a percentage of volume varies as market volumes likely to follow daily trends of
peaking towards the start and end of day.
Limit Price Number

Would Price Number
20
VWAP
One of the most widely-used strategies, the algorithm trades in-line with the expected
market volume. The VWAP algorithm uses volume profiles created from proprietary
quantitative models considering stock, sector and market characteristics, with
adjustments made on index rebalance days.
Strategy Behaviour
• Typically a passive strategy used for low participation rate orders.
• Stock specific volume models maximise performance.
• Limit Order Placement Model (LOPM) and Signal Based Scheduling (SBS) ensure optimal
execution along the volume profile.
• VWAP targets trading to the End Time regardless of market activity.
Example forecast volume profile which VWAP tracks
Close
0
00
0
0
30
:30
:30
0
0
0
:30
:30
:30
:30
9:0
:0
:0
9:3
8:0
:0
:0
:0
:0
8:3
11:
11:
13
15
13
15
10
12
14
16
10
12
14
15
Example cumulative volume profile
Increasing urgency
tightens profile
tracking
Close
0
00
0
0
30
:30
:30
0
0
0
:30
:30
:30
:30
9:0
:0
:0
9:3
8:0
:0
:0
:0
:0
8:3
11:
11:
13
15
13
15
10
12
14
16
10
12
14
15
Target Profile Lower Urgency Higher Urgency
21
VWAP (continued)
Key Considerations
• Does not adapt to unpredictable volume spikes.
• Trading small volumes passively over long durations can cause excessive timing risk.
Limit Price Number

Would Price Number
Participate on Open Y/N
Participate on Close Y/N
22
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EQ ETS Algorithmic Trading Guide Europe Markets

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EQ ETS Algorithmic Trading Guide Europe Markets

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J.P.

Morgan Private Bank Algorithmic Trading Guide

Efficient execution and liquidity access through a wide variety of sophisticated,

J.P. Morgan focusses on four core competencies:

Exceptional Client Service

Efficient execution and liquidity access through a wide variety of sophisticated,

Through a range of sophisticated global algorithms J. P. Morgan offers market leading

Aqua Central Optimisation Model

Lit Opportunistic Fair Value Model

Urgency Expected Lit Passive-Aggressive Average Dark

Market Impact Control for Higher Urgency Trading

Parameter Name Type Default Mandatory parameter? Comments

Parameter Name Type Default Mandatory parameter? Comments

Limit Price Number

• Customised aggression based on limit price.

Example Order Book

Example Order Book

• Participation level is unpredictable.

• Algorithm should not be used for opening or closing auction.

Parameter Name Type Default Mandatory parameter? Comments

Private Bank Equity Desk Annotation:

Low Medium High

Parameter Name Type Default Mandatory parameter? Comments

Limit Price Number

Private Bank Equity Desk Annotation:

• Enables aggressive- or passive-in-the money views to be accommodated.

Example Order Book

Example Price Bands

10% POV 20% POV 30% POV

• Participation level is determined by the user specified price level.

Parameter Name Type Default Mandatory parameter? Comments

Limit Price Number

• A very passive strategy with unpredictable participation rate.

Example Order Book

High 83.14 Mid

Order Placement by Urgency

• A “Would” should be set to benefit from advantageous prices.

Parameter Name Type Default Mandatory parameter? Comments

Limit Price Number

Display Size Number

Example volumes which 30% POV tracks

30% Traded Volume Market Volume

Example volumes which 30% POV tracks

30% Traded Volume Market Volume

• A “Would” should be set to benefit from advantageous prices.

Parameter Name Type Default Mandatory parameter? Comments

Target Percentage of Percent Yes Orders will be subject to a max of 50% of

Limit Price Number

• Typically a passive strategy used for low participation rate orders.

Example volume profile

30% Traded Volume Market Volume

Example cumulative volume profile

Target Profile Lower Urgency Higher Urgency

Parameter Name Type Default Mandatory parameter? Comments

Limit Price Number

• Stock specific volume models maximise performance.

• VWAP targets trading to the End Time regardless of market activity.

Example forecast volume profile which VWAP tracks

30% Traded Volume Market Volume

Example cumulative volume profile

Target Profile Lower Urgency Higher Urgency

Parameter Name Type Default Mandatory parameter? Comments

Limit Price Number

Participate on Open Y/N