Execution Algorithms

Question 1

Scheduled algorithms

Answer 1

Core idea: Follow a schedule, not alpha or smart routing.

Small + liquid + low urgency + no alpha view → Scheduled.

What they do - Slice the order over time using historical volume profile (VWAP) or equal time slices (TWAP), or fixed % of actual volume (POV).

When they are appropriate

• Small orders ≈ 5%–10% of expected daily volume.
• Relatively liquid securities.
• No strong short-term view on price (non-trending market).
• PM has higher tolerance for execution risk and wants lower market impact, willing to trade all day.

Exam key phrases

• “Order is 5–8% of average daily volume.”
• “Security is very liquid; no expectation of short-term alpha.”
• “Goal is to minimize market impact over the day.”
• “Balanced basket of buys and sells / rebalance / cashflow driven with low urgency.”
• Label in your head:

Question 2

Liquidity-seeking algorithms

Answer 2

Core idea: Hunt liquidity across venues and trade faster when liquidity is there.

Large + urgent + info-sensitive + wants to sweep whatever liquidity appears → Liquidity-seeking.

What they do - Look across exchanges, ATSs, and dark pools.

• Trade aggressively when they see size at good prices (“sweeping the book”).
• Often use market orders more than limit orders.

When they are appropriate

• Large orders with high trade urgency.
• Want to avoid big market impact but still finish quickly.
• Securities that are less liquid or have episodic liquidity.
• Concerned about information leakage from displaying big limit orders.

Exam key phrases

• “Order is 15–20% (or more) of expected daily volume.”
• “Need to execute quickly, but worried about signaling to the market.”
• “Liquidity is episodic: book is usually thin but occasionally thick.”
• “Wants to take advantage of liquidity when it appears.”

Question 3

Arrival price algorithms

Answer 3

Core idea: Trade so execution prices stay close to the price at order arrival (implementation shortfall style), with a front-loaded pattern.

Liquid + moderate size + adverse price expectation + risk-averse → Arrival price.

What they do

• Target the current price when the order hits the desk.
• Trade more aggressively at the start (front-loaded).
• Often time-scheduled or volume-participation based, but tuned to minimize slippage vs arrival price.

When they are appropriate

• PM expects adverse price movement (short-term alpha that will decay).
• PM is risk-averse, wants to reduce execution risk by finishing quicker.
• Relatively liquid stock, and order is not outsized (≲ ~15% ADV), so participating aggressively won’t blow up the price.
• Exam key phrases
• “Security is very liquid.”
• “Order is of moderate size; 10–12% of expected volume.”
• “Portfolio manager expects prices to move unfavorably during the trading horizon.”
• “Risk-averse manager wants to trade quickly / capture short-term alpha.”

Question 4

Dark aggregators (dark strategies)

Answer 4

Core idea: Hide big, price-sensitive orders in dark venues; execution is less certain.

Very large + illiquid + huge info-leak concern + low urgency / OK with partial fill → Dark aggregator
What they do

• Route orders to dark pools / non-displayed venues, not lit order books.
• Focus on minimizing information leakage and market impact.

When they are appropriate

• Large orders relative to ADV.
• Illiquid stocks or wide bid–ask spreads.
• High concern about information leakage from posting on lit venues.
• PM does not require full execution (low urgency) because fills depend on whether contra orders appear.

Exam key phrases

• “Very large position to unwind / build.”
• “Security is illiquid with wide spreads.”
• “Primary concern is information leakage / avoiding signaling intentions.”
• “Manager does not require complete execution.”

Question 5

Smart order routers (SORs)

Answer 5

Core idea: Route small orders smartly to whichever venue currently has the best price or highest fill probability.

Small + needs best venue/price + possibly urgent → SOR.

What they do

• Continuously monitor multiple venues (lit + dark).
• For market orders: send to venue with best price (NBBO).
• For limit orders: send to venue with highest probability of execution at that price.

When they are appropriate

• Small orders that will not move the market.
• Immediate execution needed (e.g., imminent price move, high risk aversion).
• Stock trades on multiple venues; best destination is not obvious.
• Limit orders where size is small enough not to leak info.

Exam key phrases

• “Order is small relative to normal trading volume.”
• “Needs immediate execution in a fast-moving market.”
• “Stock trades on many venues; unclear where to route order.”
• “Small market or limit order; limited information content.”

Question 6

What is a profit-seeking algorithm?

Answer 6

An algorithm that helps decide what/when to trade to generate alpha (timing, signal-based trading), then executes.

Focus: expected profit, not just cost minimization.

Question 7

What is an execution algorithm?

Answer 7

An algorithm tasked with transacting an investment decision already made by the PM.

Goal: minimize trading costs (market impact, delay, leakage) while meeting urgency/benchmark constraints.

Question 8

What is a cash-flow algorithm?

Answer 8

An algorithm that executes trades driven by cash inflows/outflows (subscriptions/redemptions, rebalancing, transitions).

Goal: efficiently invest/raise cash with minimal disruption.

Question 9

Quick tell: “PM already decided to buy/sell; algorithm’s job is to implement.” Which class?

Answer 9

Execution algorithm.

Question 10

Quick tell: “Algorithm determines trade timing/direction based on signals to earn alpha.” Which class?

Answer 10

Profit-seeking algorithm.

Question 11

Why does choosing the right broker help reduce delay costs?

Answer 11

A broker with the right market access, speed, liquidity relationships, and algorithm fit can fill faster and with fewer reattempts → less price movement while waiting → lower slippage/delay cost

Question 12

Delay cost vs Opportunity cost (one-liners).

Answer 12

• Delay cost: price moves while the order is being worked (can be filled later, worse price).
• Opportunity cost: portion not executed; you miss the favorable move