Opportunistic Crossing In Cash Treasuries

A schedule-based algorithm, such as QB’s Strobe for VWAP or TWAP, uses opportunistic crosses to reduce tracking error and slippage. We maintain a “behind boundary,” which is a curve of executed quantity as a function of time that we do not want to fall behind. We maintain limit orders in the hope of receiving passive fills and capturing the bid-ask spread. But as time passes and we approach the behind boundary for a given quantity filled, we may choose to cross the spread before we reach the boundary, based on temporary favorable conditions. These conditions may result from a positive short-term price forecast, meaning that current prices are better than we expect them to be in the near future, or a narrow spread, meaning that the cost of a cross now is lower than we expect it to be in the future. This note focuses on the latter: we outline a simple strategy to make crossing decisions based on the dynamics of the bid-ask spread, comparing its current value to forecast future values.

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