Algorithmic Trading

1. Algorithmic Trading Equity Trading vs. Futures Trading Morgan Stanley Institutional Securities This material has been prepared for information purposes to support the promotion or marketing of the transaction or matters addressed herein. It is not a solicitation of any offer to buy or sell any security, commodity or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Morgan Stanley research department. It was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Past performance is not necessarily a guide to future performance. Please see additional important information and qualifications at the end of this material.

2. What is an Algorithm? • A pre-defined step-by-step method to accomplish a task • A computer model that takes an order and structures a sequence of trades that aim to achieve the stated objectives… • Minimize cost compared to a defined benchmark • Maximizing fill rate • Minimizing execution risk

3. Trends Behind Algorithm Trading EQUITIES FUTURES Regulatory Changes  – Electronification of Markets   Improve Scale & Efficiency   Desire for Anonymity   Realization that Trading Is a Source of “Incremental Alpha”   Desire to Reduce Explicit and Implicit Trading Costs  

4. Impact of Algorithms on Traders “Algorithms are productivity tools” “Algorithms are just ONE of the tools available…”

5. TCA Execution Sort Limit Order Prog. Feedback Loop Control Crossing vs.Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation Trade Lifecycle

6. Execution Evaluation Execution Evaluation Trade Lifecycle EQUITIES FUTURES

7. Volume Significant Event Time of Day Price Time Time Volatility Size of Trade Global Economic Events Execution Evaluation Spectrum of Difficulty

8. Liquidity Urgency Trade Size Execution Evaluation: Fit the Algorithm to the Strategy Single Algorithms Multiple Algorithms Algorithm & DMA Algorithm & Trader Price Limits Applicationof Constraints Volume Limits Time Limits

9. Benchmark Determination Benchmark Determination Execution Evaluation Execution Evaluation Trade Lifecycle EQUITIES FUTURES

10. More Structure Less Structure Benchmark Determination Order(s) Trade Structure Development Examples

11. Trade/Trajectory Planning Trade/Trajectory Planning Benchmark Determination Benchmark Determination Execution Evaluation Execution Evaluation Trade Lifecycle EQUITIES FUTURES

12. TCA Execution Sort Limit Order Prog. Control Feedback Loop Crossing vs.Liquidity Pool Trade/Trajectory Planning Benchmark Determination Parameters Available for VWAP are: Execution Evaluation 1. Price Limits 2. Duration Limits 3. Volume % Limits Trade/Trajectory Planning • The VWAP strategy creates a trade plan that emulates the historic volume distribution (either all day or interval). • Trajectories are static from the beginning of the trade and do not respond to changes in intraday liquidity. • Volume distributions are determined by country and adjusted for seasonal factors such as expiration days, and month/quarter ends. • The BXS VWAP strategy attempts to minimize shortfall versus VWAP as well as minimize the market impact into achieving that price, thus minimizing the total cost of the trade VWAP

13. TCA Execution Sort Limit Order Prog. Control Feedback Loop Crossing vs.Liquidity Pool Trade/Trajectory Planning Benchmark Determination Parameters Available for TPOV Orders: Execution Evaluation 1. Price Limits 2. Duration Limits Trade/Trajectory Planning • The BXS TPOV strategy is designed to participate with either the primary or composite volume at a user specified rate. • Order quantities are determined for individual time sub intervals and scheduled for execution according to continuously updated forecasts of volume Target Percent of Volume

14. TCA Execution Sort Limit Order Prog. Control Feedback Loop Crossing vs.Liquidity Pool Trade/Trajectory Planning Benchmark Determination Parameters Available for Arrival Price Orders: Execution Evaluation 1. Urgency Level 2. Price Limits 3. Duration Limits 4. Volume % Limits Trade/Trajectory Planning Arrival Price: Low Urgency • The BXS Arrival Price strategy is designed to minimize execution shortfall to the midpoint of the initial bid/ask. • The trader determines a level of execution “urgency”- get done, high, medium, or low- which corresponds with the expected level of information content (alpha) embedded in the order. • The BXS system determines an initial optimized trading trajectory that controls the pace of execution, balancing market impact with market risk (time) based upon the level of urgency. • Trajectory is based on continuously updated forecasts of volatility, liquidity and spread, and changes dynamically during execution with the changing market conditions. • Order quantities are determined for individual time sub intervals and scheduled for execution. Arrival Price: High Urgency

15. Crossing vs.Liquidity Pool Crossing vs.Liquidity Pool Trade/Trajectory Planning Trade/Trajectory Planning Benchmark Determination Benchmark Determination Execution Evaluation Execution Evaluation Trade Lifecycle EQUITIES FUTURES

16. Crossing vs. Liquidity Pool BUY SELL • Arrival Price Medium • Buy 150,000 XYZ • Target 20% of Volume • Sell 135,000 XYZ

17. 70,000 70,000 60,000 60,000 50,000 50,000 40,000 40,000 30,000 30,000 20,000 20,000 10,000 10,000 0 0 15:00 15:10 15:20 15:30 15:40 15:50 15:20 15:30 15:40 15:50 14:00 14:10 14:20 14:00 14:10 14:20 14:30 14:40 14:50 15:00 15:10 14:30 14:40 14:50 Crossing vs. Liquidity Pool BUY SELL • Arrival Price Medium • Buy 150,000 XYZ • “I Would” – Public or Dark • Target 20% of Volume • Sell 135,000 XYZ • “I Would” – Public or Dark

18. Limit Order Prog. Limit Order Prog. Crossing vs.Liquidity Pool Crossing vs.Liquidity Pool Trade/Trajectory Planning Trade/Trajectory Planning Benchmark Determination Benchmark Determination Execution Evaluation Execution Evaluation Trade Lifecycle EQUITIES FUTURES

19. TCA Execution Sort Limit Order Prog. Control Feedback Loop Crossing vs.Liquidity Pool Trade/Trajectory Planning Benchmark Determination Execution Evaluation Limit Order Program From Liquidity Pool 5,000 Shares Net SellTB – TC Orders intoMarketplace LimitOrder Program • Residual Orders are sent to the Limit Order Program • Trades are broken down into market size increments • Multiple limit orders are then placed into the market to create a “portfolio” of orders • Limit Orders are dynamically managed based upon executions and changes in market conditions • Limit order sizes, pricing, duration and spacing between orders change continuously to minimize information leakage and “footprint” • Major factors affecting orders are volatility, spread and liquidity 5,000Shares Sell Executions and Market Data

20. Sort Sort Limit Order Prog. Limit Order Prog. Crossing vs.Liquidity Pool Crossing vs.Liquidity Pool Trade/Trajectory Planning Trade/Trajectory Planning Benchmark Determination Benchmark Determination Execution Evaluation Execution Evaluation Trade Lifecycle EQUITIES FUTURES

21. BeX CBOE BATS ISE Stock Exchange EDGX /EDGA TRAC /DATA NSX /CINN ONTD CHX BTRD PHLX Pipeline AMEX POSIT NASDAQ INET Liquidnet NYSEArca NYFIX Millennium NYSE BIDS LEHLCX NASDAQCrossingNetwork CITIACE Matchpoint UBSPINS ITG BlockAlert FidelityCrossStream ATS's ISEMidpointMatch CSCrossFinder ITG Now GSSigmaX Instinet(CBX, etc.) MSTrajectoryCrossing Broker Dealer LeveL MorganStanleyPOOL ECNs EXCHANGES SMART ORDERROUTING TECHNOLOGY SORT ATS's

22. TCA Execution Sort Limit Order Prog. Control Feedback Loop Crossing vs.Liquidity Pool Trade/Trajectory Planning BTRD ITS/CAES Benchmark Determination Execution Evaluation INCA SUPERMONTAGE ISLD BRUT Smart Order Routing Technology — SORT LimitOrderProgram • SORT is the vehicle through which BXS executes limit orders in the marketplace. • SORT creates a consolidated order book from all available liquidity pools. • After the Limit Order Program determines the size and price of an individual order, SORT determines which liquidity pool(s) the order should be placed in. • SORT will slice orders to access multiple liquidity pools simultaneously. • Major factors influencing the choice of destination include current and historical price, liquidity and speed. • SORT is utilized for NASDAQ as well as Listed stocks orders. • Additional Smart Order Routers include SORTETF for Exchange Traded Funds and OSORT for listed equity options. SORT NYSE AMEX Consolidated Order Book XYZ XYZ Bid Bid Offer Offer 93.38 93.38 Last Last 93.40 93.40 500 500 93.39 93.39 300 300 Size Size PX PX Size Size PX PX 500 500 93.38 93.38 300 300 93.40 93.40 1000 1000 93.37 93.37 500 500 93.41 93.41 300 300 93.35 93.35 200 200 93.44 93.44 100 100 93.31 93.31 400 400 93.47 93.47 700 700 93.27 93.27 1000 1000 93.48 93.48 1500 1500 93.25 93.25 700 700 93.52 93.52 ARCA

23. Execution Execution Sort Sort Limit Order Prog. Limit Order Prog. Crossing vs.Liquidity Pool Crossing vs.Liquidity Pool Trade/Trajectory Planning Trade/Trajectory Planning Benchmark Determination Benchmark Determination Execution Evaluation Execution Evaluation Trade Lifecycle EQUITIES FUTURES

24. TCA TCA Execution Execution Sort Sort Limit Order Prog. Limit Order Prog. Control Control Feedback Loop Feedback Loop Crossing vs.Liquidity Pool Crossing vs.Liquidity Pool Trade/Trajectory Planning Trade/Trajectory Planning Benchmark Determination Benchmark Determination Execution Evaluation Execution Evaluation Trade Lifecycle EQUITIES FUTURES

25. Post Trade(Performance by Desk or Trader)

26. Expiration Economic News/Events Cash Market Events Extension of the EquityModel Foundation Development of Algorithms for Futures: The 80/20 Rule 20 % Accelerate the Development of Predictive Models for Futures Using Existing Models 80 %

27. What’s Next Cross AssetCorrelation • Control Behavior • Define your own algorithm • Act like a sales trader BLACK BOX

28. Algorithmic Trading Equity Trading vs. Futures Trading Morgan Stanley Institutional Securities This material has been prepared for information purposes to support the promotion or marketing of the transaction or matters addressed herein. It is not a solicitation of any offer to buy or sell any security, commodity or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Morgan Stanley research department. It was prepared by Morgan Stanley sales, trading, banking or other non-research personnel. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Past performance is not necessarily a guide to future performance. Please see additional important information and qualifications at the end of this material.