Relative Value Trading– Patent Awarded for the Unique Visualization of PAIR Orders
Relative value trading is an investment strategy where one or more securities are traded in relation to another. Let’s assume that an investor likes a particular stock but is uncertain if the recent stock market rally will continue. To minimize volatility and benchmark risk, the investor could simultaneously buy the stock and sell a stock index future at a “spread.” A long only investor could achieve a similar strategy by simultaneously purchasing an inverse stock index ETF (whose value rises if the market declines). In these examples, the investor has changed the investment from having to be right both on the market and the stock to just being right that the stock’s performance will outperform the market.
Relative value trading strategies are growing in popularity. Over the past two years, Tradebook’s PAIR platform has experienced an 87% increase in the number of relative value strategy orders. The popularity is due, in part, because asset classes across geographies are becoming more electronically accessible. Investors can now algorithmically implement alpha capture strategies using multiple equities, options and futures that simply were not possible in manual markets.
Some strategies can be very complex, involving multiple instruments with each instrument having its own pricing – current bid, current ask, last price, etc. The multiplicity of instruments in a strategy (order) thus implies a multiplicity of values that might be relevant to trading decisions. Yurij Baransky and Vipul Nagrath have created innovative data visualization – a better presentation of data and market information to assist traders in immediately and intuitively understanding what is happening with the investment and execution implementation.
Yurij and Vipul have created a PAIR trader’s “cockpit.” Studies find that the human brain deciphers images and color simultaneously and more rapidly than the traditional grid of numbers. Images can elicit strong emotional responses. Their patented display uses color and icons to communicate for fast and immediately consumption the marketability of a strategy, its current state and the side (buy/sell) of the instrument in the strategy.
Relative value trades can be expressed with many spread types. For example, as a simple spread (e.g. A-B), a ratio (e.g. A/B), a % change (e.g. 100*(A∆% – B∆%)), merger arbitrage (xB + $ – A), etc. This novel visualization technique also provides investors with an easy comparison across different spread types. For instance, the trader can visualize whether a $0.10 simple spread for Strategy A is more marketable than a $2.00 simple spread in Strategy B or a ratio spread of $1.342 for Strategy C. Of course it all depends on the details of the strategy, but with the same brainpower, this technique enables traders and investors to visually compare different strategies to get a good “feel” for how “close” each strategy may be to getting done.
Congratulations to Yurij and Vipul on the patent. For more information on the “PAIR” front-end and the execution algorithm, contact a Tradebook Execution Consultant.
Yurij Baransky is the Global Head of Product Development where he oversees all aspects of building and maintaining Bloomberg Tradebook’s equity, derivatives, FX, fixed income and algorithmic trading functionality. Yurij joined Bloomberg L.P. in 2000, and has held various programming and management positions in Bloomberg R&D. He previously oversaw the US Listed Options trading platform and his team developed and launched the Tradebook PAIR trading platform.