[ S P O N S O R E D C O N T E N T | B E R E N B E R G ]
The buy-side continues to face challenges in appropriately bucketing orders based on their alpha profiles and characteristics such as volatility, spread, and liquidity. Traditionally, algo wheels assign strategies based on metrics like average daily volume( ADV), notional, or by benchmark aiming to minimise trader bias. In recent years, a shift toward arrival based, liquidity-seeking strategies has emerged, freeing traders to focus on larger, more complex orders. Using Berenberg’ s proprietary Trading Intelligence Analytics( TIA) platform, we analysed two years of trades across 25 + markets, incorporating historical and Level 3 market data to assess whether this shift resulted in better performance across all buckets of flow.
Should timing risk versus market impact drive strategy selection? The short answer is, yes. Balancing timing risk( adverse price movements over the trading period) against market impact( price disruption from aggressive trading) is critical for algo selection in single-stock and program trading. This balance directly affects performance relative to the arrival benchmark. When choosing between a VWAP OTD strategy versus a liquidity seeking approach, traders assess whether the market impact of trading at higher participation rates outweighs the timing risk of slower execution.
“ Our analysis shows that for certain order subsets, combining a VWAP strategy with an Implementation Shortfall( IS) overlay – termed VWAP-Arrival – yields significantly better execution outcomes against an arrival benchmark,” says Jason Rand, global head electronic trading and distribution at Berenberg. This is because the reduced impact from trading slower results in overall better
VWAP-Arrival: A dynamic approach to reducing arrival slippage
Berenberg’ s VWAP-Arrival strategy uses dynamic participation, adaptive logic, and precise volume forecasting to reduce slippage and improve execution versus arrival benchmarks.
execution, as opposed to a more aggressive strategy.
The evolving landscape: Declining lit market share European equity markets have seen a steady decline in lit market volume share over the past seven years, with 2020 as a temporary outlier due to Covid-driven volatility. As lit order books shrink, optimal participation rates must adapt. Passive strategies increasingly outperform aggressive ones, particularly in low alpha decay or less time-sensitive environments. The proliferation of bilateral liquidity arrangements and their less understood impact on the lit order book could be another factor.
With that said, strategy selection remains nuanced. Key factors of consideration such as alpha decay( more critical for hedge funds than fundamental investors), ADV, spread, volatility, and time-of-day all influence whether an order should be executed passively or aggressively.
Understanding ADV and its limitations The relationship between order size and ADV is foundational for setting participation rates. Larger orders relative to ADV require lower participation to minimise impact. However, relying solely on ADV can be misleading, as it includes full-day volume, penalising orders
12 // TheTRADE // Q2 2025