Algo Toolbox series: Dynamic POV: Beating the benchmark with an adaptive scheduled algo

Key takeaways

• Dynamic POV is an execution algorithm that builds on the traditional percent of volume strategy, using analytics from Liquidnet Investment Analytics (IA) to adapt the traditional POV strategy to respond dynamically to market conditions, while still tracking closely to the target participation rate.

• The algorithm uses signals from Liquidnet IA to identify when a dislocation between a stock and its correlated basket has occurred. Analysis suggests there is consistent mean reversion among Dynamic POV orders following shifts by the algorithm in an order’s participation rate. Orders with shifts in their participation rate outperformed the PWP linked with their original target rate by +6.1 bps.

• Dynamic POV has demonstrated it tends to provide a similar controlled participation to a standard POV, but with measurably better performance.

• Dynamic POV performs well against key benchmarks, with a slippage versus arrival price of -1.0 bps and an outperformance of the Interval VWAP of +1.3 bps.

• Use of a Block Would overlay alongside Dynamic POV led to improved performance, with orders using the block overlay outperforming arrival by +.4 bps and the PWP linked with their original target rate by +44.4 bps.

This report has been compiled by Gareth Exton, Head of Liquidnet's Execution + Quantitative Services EMEA and Conor Diviney, Execution Consultant

Please refer to the report for all data and sources.