ATSs Challenge Traditional Trading Venues

Terry Flanagan

Operators of alternative trading systems are using a variety of means to attract liquidity to their venues, while differentiating themselves from each other and traditional exchanges.

IEX Trading, a registered ATS owned by a consortium of mutual funds, hedge funds, family offices, and individuals, seeks to operate a market that works for investors by balancing the interests of traditional investors, brokers, and the market venue.

“We set out to start up a buyside owned trading venue,” said Ronan Ryan, chief strategy officer at IEX. “Of the 45 existing ATS, we are the only one funded and owned by the institutional buyside, as opposed to a broker or a consortium of brokers.”

In order to deter predatory trading strategies that take advantage of mismatches in connection speeds, IEX has set up its trading platform so that firms can co-locate their servers with its matching engine in one facility, but must access those servers from another location.

“We are known for our colocation model, which is different from the typical colo model,” said Ryan. “Whereas other markets are looking to provide colo and low-latency connectivity into their matching engine, we’ve decoupled our technology. We colocate our matching engine in one building, and you access our venue in a separate building.”

IEX’s matching engine is located in the Savvis data center in Weehawken, N.J., and its access point, or POP (point of presence) is located in the Equinix facility in Secaucus. “Everybody must access us through the Equinix facility,” said Ryan. “Those who are co-located at our matching engine in Weehawken cannot access us there. The earliest you’ll find out that a trade occurred on IEX is 350 microseconds after the trade occurred. By having that time separation, we delay the receipt of the trade acknowledgement.”

Buy-side traders are seeking trading venues that provide access to liquidity without having to give out information that could compromise their trading positions.

One such venue is provided by PDQ ATS, which is powered by an algorithm hosting facility and response mechanism that’s designed to emulate the dynamics of traditional floor brokers, while retaining anonymity and confidentiality.

The PDQ ATS auction model provides increased liquidity discovery and price improvement through an “electronic algorithmic crowd” competing for orders. When an order is received by PDQ’s auction model, the order is paused for a full 20 milliseconds, and in that time algorithms respond with their most competitive quotes to build a “mini book” where the responses are prioritized on a price-time basis. At the end of the 20 milliseconds the trade is matched against the newly created book.”

IEX is unique in that it only has brokers as subscribers, recognizing their integral role in the investment process, said Ryan.

“Any broker can connect to us, whether they’re high frequency or not,” he said. “We have buyside owners but sell side subscribers. As with most venues, both the sell-side and the high-frequency firms that are technically broker/dealers connect to our venue. The buyside can’t connect directly to us; they need to connect to us through broker/dealers.”

IEX, which launched in October 2013, recorded an average of 30 million shares a day last week. “The brokerage community is impressed with the volumes we are doing at a very early stage,” Ryan said. “It’s a very different model. We have no broker owners that are seeding us with flow. We are the only venue with no maker-taker, the only venue that insists you connect to us in another building, the only ATS to post our Form ATS on the web. That’s a very different type of transparency.”

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