BUY-SIDE TECHNOLOGY AWARDS: Best buy-side newcomer (vendor or product): Knight Direct–Oasis

Mainstream algorithmic trading tools have proven indispensable for many investment managers and hedge funds trading high-volume, large-cap positions. Now that markets have grown more volatile, the development of an algorithm targeting small- and mid-cap securities, historically overlooked by electronic trading technology providers, is an idea whose time has come. Knight Direct’s Oasis category-specific algorithm does just that, and takes this year’s award for the best buy-side newcomer.

Available for US markets since June 2009, Oasis was reconfigured for European equity markets this year, sourcing both lit and unlit liquidity in low-volume stocks using historical and intra-day data.

In developing Oasis, Knight is able to offer an alpha-generation tool to investment managers eager to trade more small-cap stocks, but who are wary of the operational risks involved in having to manually execute these securities, as a way to differentiate performance.

Powered by Knight’s FAN smart order-execution algorithm (see page 57), Oasis performs pre-trade analysis to examine an order’s liquidity, volatility, pricing trends, and momentum. Its limits are set by traders in order to minimize explicit costs as well as market impact. Oasis also includes anti-gaming features enabling users to withdraw from venues in the event of adverse or suspicious spread changes.

Considering how relatively untapped small- and mid-cap securities are as potential alpha sources for managers, Knight’s initiative to enable more automated and efficient trading in these names makes for a compelling new trading tool. —SE

JUDGE'S COMMENT
Oasis opens up the small and mid-cap securities market to the buy side as a new and potentially lucrative source of alpha.

KNIGHT DIRECT REACTION
“Oasis was the first category-specific algorithm developed for trading in small- and mid-cap stocks and we are delighted by the level of client adoption and positive feedback we have received. We developed Oasis in response to our clients’ priorities and the recognition that trading in small- and mid-cap equity stocks is a high-alpha generating sector for many portfolio managers. Oasis has negated the assumption that algorithms do not work where high volatility and low volumes combine. Oasis is a patient algorithm with anti-gaming logic designed to pull orders out of a liquidity pool if changes in spread levels suggest pinging—this is just one of a number of anti-gaming techniques. It works by performing a pre-trade study once an order has been submitted, evaluating liquidity, volatility, price trend and momentum, in order to gain understanding of the scenario characteristics.”
—Joseph Wald, managing director,
Knight Direct