‘Passive Algorithms’ are automated trading strategies designed to execute orders with minimal market impact, typically by waiting for liquidity to come to them rather than aggressively taking available liquidity. In crypto investing, these algorithms are employed for large institutional orders or index rebalancing, using techniques like limit orders or hidden orders on exchanges or within dark pools. Their purpose is to achieve best execution prices over time while minimizing price movement caused by the order itself.
Mechanism
The operational logic involves placing orders at or near the current bid or ask, or at the midpoint, without immediately crossing the spread. These algorithms often incorporate factors like time-weighted average price (TWAP) or volume-weighted average price (VWAP) benchmarks, adjusting order size and placement based on real-time market conditions and available liquidity. They monitor order book depth and passively fill slices of the larger order over an extended period.
Methodology
The strategic approach for passive algorithms prioritizes cost efficiency and a reduced market footprint for substantial trade volumes. This methodology involves sophisticated order management systems that continuously assess market dynamics, including volatility and order book pressure. The objective is to secure favorable execution prices by capitalizing on natural market flow and minimizing adverse selection, often contrasting with aggressive, liquidity-taking strategies.
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