InsightsFebruary 17th, 2023
In our article published last year, ‘Keeping Pace with Pairs’, we noted the continued popularity of pairs trading amongst investment managers and explored TORA’s pairs trading functionality in some depth.
Since then, due to various macroeconomic factors, global market volatility has risen significantly and many investment firms – including those who have traditionally focused on equity long/short, long-only or other directional strategies – are now starting to look at market neutral strategies as an alternative source of alpha.
This has triggered an even stronger interest in pairs trading, which can offer great flexibility when establishing market neutral positions. Having the ability to create and manage pairs that can include not only stock components, but also futures/options, ETFs, baskets, bonds, FX, crypto/digital assets and more, allows investment firms to make the most of the types of non-directional, volatile markets we are facing today.
Market Neutral Pairs Strategies
There are of course various types of pairs strategy that allow firms to lock in volatility while remaining market neutral. Some of the more common ones we see at TORA are CB arbitrage (long CB, short stock of the same issuer), relative value arbitrage (stock versus futures), AH arbitrage in Asia (‘A’ shares versus ‘H’ shares), ETF/index arbitrage, StatArb & other mean reversal strategies, and countless more.
However, in order to create, execute, manage and value these types of strategies, it is vital that firms have the necessary functionality within their OMS & EMS systems to fully support pairs trading in all its forms, particularly where there is any kind of cross-region, cross-currency, cross-asset, or cross-broker aspect involved. Opportunities can be quickly lost when a firm has to adapt its pairs trading workflow to overcome system deficiencies, rather that being able to configure and adapt the system to match its needs.
At TORA, we recognise the importance of flexibility when it comes to pairs trading. As well as offering a comprehensive range of pre-defined market-neutral pairs strategies as standard, we give clients the ability to create their own, tailored to suit their requirements. Various algorithmic and automated execution styles are available in the system, each with fully configurable rules around how each leg of a pair is handled under different conditions.
To reduce the market impact of large pairs orders, TORA provides an advanced TWAP execution algorithm, which can be fine-tuned around desired levels of passive and aggressive slices, and which also allows for partial hedging in specific circumstances.
TORA also enables cross-currency pairs to be dynamically auto-hedged – using pre-defined or real-time FX rates – to maintain FX neutrality as well as market neutrality. And for pairs containing short stock positions, TORA links up to major prime broker stock borrowing desks via eLocate.
As firms seek alternative ways to capture alpha by locking in current market volatility and increasingly adopt market neutral pairs strategies, it is essential that they are not limited by their systems. With TORA’s extensive pairs functionality, clients are only limited by their imagination. If you’re interested in learning more, please contact us and we’ll get back to you straight away.
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Tora Trading Services LLC is registered with the SEC and a member of FINRA, SIPC, NFA. TORA Trading Services Limited is regulated by the HK SFC. This communication is for informational purposes only and intended for institutional customers and eligible counterparties as defined by the respective regulators/authorities. Not all TORA services and related services are offered via the regulated entities. In addition TORA services are not available in all jurisdictions.