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Duration: 6:07

Level: Intermediate

This lesson will explore the Adaptive Algo which is designed to ensure that both market and aggressive limit orders trade between the bid and ask prices. On average, using the Adaptive algo leads to better fill prices than using regular market or limit orders. This algo order type is most useful to an investor when the spread is wide, but can also be helpful when the spread is only one tick.

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Study Notes:

IB’s Adaptive algo order aims to combine speed of fill with possible price improvement by adapting to current market conditions. The Adaptive algo works to give you the fastest fill at the lowest all-in price. It also allows investors to enter prices inside the bid/ask spread offering TWO possible opportunities to reduce overall costs. One, by executing the order at a price better than the prevailing bid or ask price. And two, by potentially adding liquidity on an exchange that offers a rebate to liquidity providers.

Investors might consider using the Adaptive algo especially for stock and option trades where the price quote is wide. And don’t worry about the size of your order, because the algo will automatically break large orders down to avoid overwhelming the market.

The algo can be used as an Adaptive Market or Adaptive Limit order depending on your objective. In Mosaic, use the order entry window to set up an order to buy. Select the ticker you wish to trade and click on the Buy button. Use the quantity field to set the number of shares you want to buy. By clicking on the Adaptive button next to the price quote, your order type becomes an Adaptive Limit order.

Above the price input field on the Order Entry panel is the Price Line. This allows clients to quickly select a price for their order below the prevailing bid or above the current ask by either clicking on the values or by clicking on the price line itself. Notice how quickly you can locate and select the mid-price for a security. You will also see that as the cursor is moved along the Price Line the Bid/Ask display is replaced by a single value according to the location of the mouse. This enables users to enter orders inside of the prevailing spread. Clicking on the line will populate your limit price in the order entry panel.

To the right and below the Adaptive button you will see up and down arrows. Investors now have three ways to view the Price Line: The absolute price remains the default view. But clicking on the arrow heads reveals choices for percentage of spread and tick increments. Again, this enables investors to enter an order inside the spread, offering the potential for price improvement for their order.

Selecting either the percent of spread or price ticks displays a row of buttons for investors whose values are calculated by measuring the bid/ask spread at that moment. Clients may then select bid minus a percentage, which is calculated upon selection. Or they may choose Ask plus a selection, again displayed when clicked. For example, for a buy order where the bid/ask spread is 10-cents wide, the selection of bid-50% would create an order at five –cents below the bid. For a sell order of the same spread, selecting Ask+100% would create a sell order 10-cents above the Ask price.

Selecting the price ticks from the arrow head expansion button works in the same way except that the values are displayed in terms of ticks rather than percentages.

If you prefer to use the Price Wand, click on the limit price field. Two columns are displayed. On the left is the traditional absolute price wand, pinpointing Ask, Midpoint and Bid prices, while the ability to make this a Market order is displayed at the top of the column. On the right is the relative price wand which defaults to the % of spread display. Use the icons to the lower right to toggle between % of spread and tick increments. Note the slider to the right easily allowing you to locate your desired price above or below the last traded price. Use the expand contract arrows in the lower right corner to hide the % of spread column altogether.

Unlike a simple market order that hits the ask and fills for a buy order, the Adaptive Market buy order pegs close to the bid price and works from there to scan for the best price.

The Adaptive Limit order works in similar fashion but uses the limit price as a cap (for a buy order). Like a simple limit order type, the Adaptive Limit will only fill at the specified limit price or better.

Use the Advanced button to open the priority parameters. Click on the Priority/Urgency drop-down menu to make a selection favoring either speed (urgent) or price (patient).

This innovative order type incrementally checks prices from the bid to the ask to fill the specified quantity at a price better than the prevailing ask. The time taken to scan for better prices is determined by the priority setting you select. The ‘critical’ ‘Urgent’ setting scans only briefly, while the ‘patient’ scan works more slowly and has a higher chance of achieving a better overall fill price for your order.

There is a risk, especially with the ‘patient’ priority setting, that during the scanning time, the price of the security may move away from the original price.

The Adaptive order type allows investors to enter market or limit orders. Non-marketable limit orders may also benefit from transacting on an exchange paying a rebate to the client for adding liquidity.

Unusually, Adaptive Market orders may also qualify for an exchange rebate depending on where the order fills and whether it adds liquidity at the time of trade. Typically, market orders remove liquidity.

Like all of our IB Algos, you can set up an Adaptive order in both the Mosaic and the Classic TWS interfaces.

To learn more, click the Question Mark next to the Adaptive button to display the cheat sheet, or search for the word “Adaptive” on the IB website.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Supporting documentation for any claims and statistical information will be provided upon request.

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Order Types / TWS

The order types available through Interactive Brokers LLC’s Trader Workstation are designed to help you limit your loss and/or lock in a profit. Market conditions and other factors may affect execution. In general, orders guarantee a fill or guarantee a price, but not both. In extreme market conditions, an order may either be executed at a different price than anticipated or may not be filled in the marketplace.

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