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Can Bank of America Algo Act as a Flash Crash Firewall?

With the Flash Crash raising concerns about algorithmic strategies, BofaML has devised a quant algo for futures that slices up an order to deal with volatile events such as releases of economic data.

With the Flash Crash of May 6th turning the spotlight on algorithmic trading strategies and what controls that were lacking, quants at Bank of America Merrill Lynch (BofA Merrill) recently unveiled Microslice algorithm for futures, a sophisticated tool that helps institutions execute a continuous wave of micro-sized orders over a short time period when they are facing known or potential volatile events.

The genesis of the algorithm was that lots of economic data is released during the trading data in the futures markets. “We were getting requests from clients for a specific futures algorithm that allow traders greater control in a short period of time or a long period of time,” says John Hyde, execution consultant at BofA Merrill.

“Economic releases happen more during the trading day in futures than in the cash equities market,” explains Hyde, adding that traders can use the algorithm to execute around those potential volatile events as well as the cash equity open or close. Traders have to plan their trading around the Fed calendar, Treasury results, energy announcements, grain, crop and orange juice reports, and the energy space is constantly releasing storage data, he notes.

With feedback from clients, BofaML’s quants came up with a linear participation strategy, which is different than a passive strategy such as VWAP or TWAP, or a volume participation strategy reportedly used by a buy-side firm during the Flash Crash. Hyde said Microslice can be used for targeting the open or close of the cash markets, or it can be used to exit and enter the futures markets around economic numbers.

Though the algo was created after the Flash Crash, it was not to address any concerns from May 6, according to a BofAML spokesperson. It was a tool created based on client feedback to use around known volatile events or potential volatile events (like a technical breakout or options expiration), says the spokesperson. Launched over the past four weeks, BofA Merrill has rolled out the futures algo in the Americas and the EU, and plans to introduce it in Asia Pacific in Q2 of 2011.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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