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BMO Capital Markets - Quantitative Execution Services
Quantitative Execution Services
Volume Participation

Objective: To execute at a client-specified percentage of the volume.

The BMO Capital Markets ‘Participate’ trading algorithm allows a trader to participate in the trading of a stock as the natural volume permits. The trading strategy tracks the volume of the stock from the time the trader enters the order into the system and then participates at a trader-specified percentage of the total volume. Block trades are ignored, preventing the strategy from forcing a stock appreciably higher or lower in an effort to “catch up”. The Participate algorithm is a reactive strategy, responding to activity in the market. Its primary objective is to stay involved in trading at a given rate, not to target a VWAP execution.

Considerations and Risks

The Participate algorithm uses volume traded as its primary driver. Therefore, for trades in liquid stocks or where a client is “VWAP sensitive”, the VWAP algorithm (which uses vwap as a benchmark) is likely a better trading strategy. Moreover, in fast markets the Participate strategy is likely to fall behind a volume target as the algorithm attempts to capture the bid-ask premium while additional stock trades in the market. Less liquid situations are a better fit for the Participate strategy, where trading volumes will be in line with the market activity. The main risk with a participation strategy is that bids or offers may be of insufficient depth to allow an order to participate at the same prices as the trigger orders, and produce a fill that deviates from the market VWAP.

Bid-Ask Spread: Similar to the VWAP strategy, the Participate algorithm attempts to capture the liquidity premium by offering or bidding for stock. However, this strategy is likely to pay the liquidity premium to fulfill the volume requirement. A fill from a Participate order should therefore be reviewed in this context.

Mitigating Actions: Price limits may be set, which may impact the ability to maintain the target participation rate.

Best For: Trading relatively illiquid stocks where immediate execution (i.e. a block trade) is not required.
Please contact Quantitative Execution Services (416) 359-5743 if you have any questions

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