The cost savings benefit of passive order placement
One of the key performance metrics for any TWAP strategy is what portion of child orders are providing liquidity. Liquidity provision (often referred to as “maker”) is rewarded by liquidity venues in the form of reduced, or even zero, fees. “Taker” orders, which access immediately available liquidity, generally cross the spread to do so.
The Talos TWAP algorithm is designed to minimize costs associated with crossing the spread and paying taker fees by intelligently managing child orders and focusing on posting liquidity on the passive side within the target schedule.
The impact of order size on passive order placement
A limiting factor to how passive the strategy can be is the size of the order relative to available liquidity in the broader market, or the volume participation rate. When a parent order is a significant percentage of the overall market volume for the time specified, the strategy will need to take liquidity more often in order to stay on schedule.
This is illustrated in Figure 1, where we see a strong relationship between the volume participation rate and the maker rate achieved by the strategy. As the relative order size increases, the strategy’s ability to post child orders passively decreases.
Note that there is a weak relationship between these two variables and slippage relative to the TWAP benchmark. This indicates that, in general, the strategy can achieve the TWAP while minimizing taker fees and crossing the spread.
Figure 1: Volume Participation Rate vs. Maker Percentage of Talos TWAP Orders - Q1 2023
This chart represents all orders executed via the Talos TWAP strategy across spot, futures, and perps, for the 3 months ending March 31, 2023. Only orders with durations between 10 and 60 minutes are included, to reduce the incidence of extreme orders and events.
Talos’s TWAP cost savings
How much can the Talos TWAP strategy save? Just looking at explicit costs, i.e., the difference between maker and taker fees, we can make some conservative estimates. For orders between 5-10% of market volume, the strategy achieves a median maker rate of 88%; 69% for orders 10-15% . (See Figure 2).
On a typical exchange, maker fees are 10 bps less than taker fees. For orders that are 5-10% of volume placed through a TWAP strategy that exclusively submits crossing orders, the fees would be more than eight times higher. To put this in perspective, $10,000,000 of orders that are between 5-10% of volume will save $8,800 when executed through Talos’s TWAP versus a spread-crossing TWAP strategy.
Figure 2: Volume Participation Rate by Bin vs. Maker Percentage of Talos TWAP Orders – Q1 2023
This chart organizes orders by volume participation rate bins, showing the distribution of outcomes for each bin.
The additional cost savings from spread capture
In addition to the explicit savings on taker fees, we should also consider the savings realized from not crossing the spread. While spreads vary across assets and time, we conservatively estimate an additional 1 basis point of spread costs saved for each maker execution.
In Table 1, we summarize the estimated savings from fees and spreads for different volumes of trading and participation rates.
Table 1: Estimated Total Savings from Fees and Spreads using Talos TWAP
1 Assumes a 2–10 bps difference between maker and taker fees.
2 Assumes 1 bp average spread
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