Pairs Trader, a Chicago-based start-up, announced on Wednesday it is releasing a self-branded platform that enables financial traders to find and evaluate pairs trading opportunities. The platform is focused on pairs among exchange-traded funds (ETFs), but will gradually expand its offering with more assets.
The platform tracks more than 100,000 paired combinations and, based on historic data, ranks prospective trades by expected performance. Pairs Trader combines technology and research to help users analyze opportunities and plan entry and exit points to maximize profitability.
Pairs that are more likely to result in a profit are placed higher in the ranking. The ranking is based on advanced statistics that measure historical performance indicators, considering the current market conditions, as well. There are four main criteria for the calculation of pairs opportunities:
- Co-integration – co-integrated pairs are tied to each other, validating the existence of an equilibrium from which pairs move about
- Mean reversion metrics – measures to what extent a pair has diverged from its long-run average and how quickly it will revert back to equilibrium
- Rankings – opportunities are sorted according to expected profitability, based on historical performance of backtested trading signals
- Trade setup – shows which asset to long and which to short is included in all prospective pairs trades
The pairs trading platform is a good assistant to investors who trade outside of large institutions, since they usually find it harder to keep up with the large number of combinations to consider. For instance, among 100 assets, there are 5,000 pairs to consider, while among 1,000 assets the combinations are half a million.
A pairs trade is created by buying one asset and selling another one at the same time. The assets typically share a similar risk profile, so as prices change the trader’s value doesn’t change too much. The goal is to find two related assets whose relative pricing relationship has diverged from the long-run mean and profit as the relative prices revert back.
Pairs Trader was set up earlier in 2016. Currently, product portfolio consists solely from the pairs trading platform.