Order Management System - strategies

tnsn2345

Well-Known Member
#1
Dear Friends,

Its been quite a long time I have been here. Hope you all are doing good.

I am posting a new thread where I am look forward for discussion relating to Order Management System (OMS) methods deployed by seasoned traders. As a part of continuous improvement of our trading activities we are currently brainstorming on this subject.

At the onset let me make a disclosure that we process all our order and position size by automated system. This is not algo trading since decision making is manual i.e. entry, review (hold, add, reduce) and exit. Primarily the OMS is build on VWAP method and the order releasing system regulates the quantity depending upon the current price of the stock/index etc. e.g. once the position size is set by the system the orders are released at a desired frequency (say every 15 secs or 30 secs or 1 min etc) provided the price remains in the desired range (VWAP based controls). The orders are released till the set entry period based on the TF of the entire trade. Post the entry time expiry the OE system terminates its activity.

E.g.

Direction : Long
Total Size : 1000
Entry Time : 15 mins
Max Order Size : 25
Price Range for OMS : INR 1234 to INR 1235.50 (spread of INR 1.50)
Order releasing frequency : 15 secs
Order Type : Limit IOC (for Entry or Add), Market (for Reduce or Exit)


So you will see that though max quantity that can be executed in 15 mins @ 25 qty and @ 15 sec frequency is : 1500. This is 50% over the desired position size. But the actual executed quantity may be less than 1000 since all the parameters may not be fulfilled at every 15 secs.

Pls note that in the above example price range may also dynamically change based on VWAP price. Hence orders may not get triggered (which on helps you to not enter if the market goes against your direction within the entry time range.)

If any of you have been using any such OMS systems may share their ideas on this subject for discussion as we are trying to make OMS even more robust.


Regards,
 

tnsn2345

Well-Known Member
#2
Dear Friends,

As a precursor, for normal retail client, the order execution may be just a single click, while OMS are implemented for institutional or large order execution with minimal impact cost on the price of the stock. It helps to get the best prices without the market knowing the accumulation or offloading of stocks. However for a non institutional clients OMS can be used to enter / exit at best prices and also to pause exit if the conditions becomes favourable or pause entry if conditions become unfavourable.

e.g. if I have to buy 9000 NF i.e. 360 lots for a intraday TF of say 1 hr. then I can either get in at one go. But if for the next 15 mins the index remains flat or moves down then I may have to rethink about my timing ability. So here I am betting on timing my trade along with the betting on the direction of the trade too. However, since my TF is 1 hr I will have to withstand this turbulence.

Contrary, I may decide to enter this position spread over 15 mins entering 4 lots at every 10 sec. (4 lots / 10 sec x 15 mins). This will total up to 360 NF lots in 15 mins. Since all order may not get triggered at every 10 sec. I will increase the max order size by 50% to 6 lots at every 10 sec. So while I can technically enter 540 NF lots in 15 mins, (6 lots / 10 secs x 15 mins) if all parameters are within the defined range, the OMS will terminate once the entire 360 lots are executed and that could happen within 10 mins itself ( 6 lots / 10 secs x 10 mins) . This may be the best case scenario. But markets do not work straight. Hence there will be periods when execution parameters will not match and hence orders may not be released for say 2 or 3 or 4 etc mins. So this does not guarantee full order execution and I may end with less than desired 360 lots orders executed. And this is the limitation of using such system.

How does OMS help, it helps to control the order flow with minimal impact cost and also restricts entry /exit automatically during unfavourable and favourable periods respectively. This is similar to mutual fund SIP, only difference being that in SIP you have money constant and hence units variable, here you have units constant and execution variable on the basis of market price. You can also have OMS built exactly on the terms of mutual fund SIP where the money is constant and the order size will vary as per the stock price. It will depend on the TF of your investment. If the trade TF is larger (not intraday) then you can get in a stock with latter OMS, while for intraday you may chose the former.

Regards,
 
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tnsn2345

Well-Known Member
#3
Dear Dan,

Nice to see you here. Hope you are doing good too.

W.r.t. to the subject do you have any comment on OMS. I have been trying to make some break through in austerity measures on transactions costing due to impact cost, slippages and execution shortfalls on our low risk low return but heavy volume trades. Though the products are returning healthy risk adjusted returns and our current OMS is operating to its potential, this area of execution if tightened up can boost the bottom line by a few basis points and can be significant in absolute terms too.

Regards,
 
#4
Dear Dan,

Nice to see you here. Hope you are doing good too.

W.r.t. to the subject do you have any comment on OMS. I have been trying to make some break through in austerity measures on transactions costing due to impact cost, slippages and execution shortfalls on our low risk low return but heavy volume trades. Though the products are returning healthy risk adjusted returns and our current OMS is operating to its potential, this area of execution if tightened up can boost the bottom line by a few basis points and can be significant in absolute terms too.

Regards,
Hi Tnsn2345

First scenario:

- What is the volume your fund or institution trades as a whole company and if it is really big, why don't you have some body directly on the Exchange to do your orders or a direct line to the Exchange?

Second scenario:

- If first scenario not counts, what about the broker/s you use. What are his answers to your question as different brokers will give different answers.

If I miss interpreted your post, kindly correct me.

But what ever: Hope you are well too and all is fine.

Take care / Dan :)
 

tnsn2345

Well-Known Member
#5
Dan, I think you misinterpret my question. I am not talking about the order execution speed. It is about the logic of splitting the orders into smaller quantities and over a time period for efficient execution. Currently, we transact through two brokers on their online platform and one in-house dealer to supervise the OMS. So execution is not any problem with the current setup as it is automatically done with human supervision. The query is on the logic of splitting orders and time. There might be different and better ways than what we presently do. Our modified VWAP logic for entry i.e. the orders are placed when the volume increases and the direction of movement is as desired, orders are stopped when the volume increases and the direction of movement is undesired. Orders are placed when volume decreases and the direction of movement is undesired and orders are stopped when the volume decreases and the direction of movement is desired. And so on for add, reduce and exit too.

There are two main underlying reasons for the above logic:
1) The strike rate: In the normal parlance the strike rate of trade is winning trade : losing trade. This generally does not capture the magnitude of win or loss. Hence with at 60% strike rate you may be quite satisfied, but if you are participating in 50% of the movement (winners) then your effective strike rate is 30% (60% x 50%). So it is important not important to be just right, but if right, then be in for there till the right time. Also pin pointing the exact entry point does not really matter for us as we are not jobbers and we do not speculate on price certainty just after entry.

The same logic applies for exit with certain modifications and the exit is generally wound up faster then the entry.

2) Bid Ask spread : This is very of paramount importance for Options trading products when they are all priced INR 200 and below with a tick size of 5 paisa. Every couple of ticks to the price can cause dent to upto 3% p.a. on you RoI. For low returns products this does matter.


Since you handled institutional accounts, how had been your executions managed by your dealers, say like you would be placing any order which is say around 0.5% of the daily volume of that stock. Would your entry strategy be different than your exit strategy.


Regards,
 
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#6
Ok, I see.

We had an agreement with all our customers to invest long term. So there was no need to act like just to sell a huge amount of shares or futures at just one moment or in the shortest time. The same on the buy side. Most shares any way where used for covered calls trading and if market collapsed, what better could happen. As one option trades on one houndert shares, even that amount was never in numbers not to liquidate at any time through normal orders.

As all products had different strategies and higher and lower risk papers, each customer had a mix of such funds and the question was never given to use a very specific Order Management System. At begin we had such high risk funds, but after the tech bubble, in which the best fund lost over 80%, it was stopped. So I not can help you with your question, even your funds are low risk funds, but of such huge volume that I am out of range. Still I like to support your thread by showing interest to what you post.

All the best and good trading / Dan :)