ALGO TRADING STRATEGY - FULLY HEDGED AND COVERED. The algo will take A Exchange as the...

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ALGO TRADING STRATEGY - FULLY HEDGED AND COVERED. The algo will take A Exchange as the reference price, then analyse all prices and amounts on that order book, and replicate these orders on @ B Exchange. The algo therefore uses the A Exchange as a source of information and only opens orders in B Exchange. These orders are open with a small margin. As soon as an order is taken on B, the algo will act as a taker on A to hedge its position. This mean that as soon as we well on B as a maker, we will buy back as a taker on A. This ensures inventory is stable Balance as per below A B 100 Stocks (Dividable into decimal places) USD1,000,000 100 Stocks (Dividable into decimal places) USD1,000,000 A Order book - sell side Volume - Price 7-8000 20 - 7000 10 - 6000 B Order book - sell side Volume - Price 7-8040 20-7035 10-6030 1. (a) What is the margin the algo is applying on the best offer? (b) What are the balances of both exchanges after the best offer is executed with this trading strategy? ALGO TRADING STRATEGY - FULLY HEDGED AND COVERED. The algo will take A Exchange as the reference price, then analyse all prices and amounts on that order book, and replicate these orders on @ B Exchange. The algo therefore uses the A Exchange as a source of information and only opens orders in B Exchange. These orders are open with a small margin. As soon as an order is taken on B, the algo will act as a taker on A to hedge its position. This mean that as soon as we well on B as a maker, we will buy back as a taker on A. This ensures inventory is stable Balance as per below A B 100 Stocks (Dividable into decimal places) USD1,000,000 100 Stocks (Dividable into decimal places) USD1,000,000 A Order book - sell side Volume - Price 7-8000 20 - 7000 10 - 6000 B Order book - sell side Volume - Price 7-8040 20-7035 10-6030 1. (a) What is the margin the algo is applying on the best offer? (b) What are the balances of both exchanges after the best offer is executed with this trading strategy?

Answer rating: 100% (QA)

a To determine the margin the algo is applying on the best offer we need to compare the best bid pri... View the full answer