03.27.2013

Buy Side Seeks New Liquidity Venues

03.27.2013
Terry Flanagan

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.

Ed O’Malley, president, PDQ ATS

Ed O’Malley, president, PDQ ATS

“A unique characteristic of PDQ is our method of preventing information leakage,” said Ed O’Malley, president of PDQ ATS. “When an order comes in, we only send out the stock symbol, not the size or the price of the order. Then the liquidity providers respond based on their knowledge that there is activity in that symbol.”

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,” said O’Malley. “At the end of the 20 milliseconds the trade is matched against the newly created book.”

Information leakage is also prevented by storing all data at a secured data center. “There’s a firewall which prevents leakage of information,” O’Malley said. “That’s appealing for our institutional clients, because they can trade in block sizes and we can aggregate enough liquidity on the provider side to fill that order.”

While the buy side has grown attuned to the anomalies presented by algorithmic and high-frequency trading, and have come to embrace it to a certain extent, the utility of these strategies has declined over the past year as the equity markets have been relatively stagnant.

“As an asset class, equities have presented fewer opportunities to make money,” a head of a West Coast hedge fund that specializes in algorithmic trading told Markets Media. “The overall environment for algorithmic and high-frequency trading is less attractive than it was several years ago.”

PDQ offers AlgoSuite, a suite of order types designed for manual traders. AlgoSuite’s flagship order type, AlgoWork, is designed to attain the best price at the national best bid and offer. It starts by posting the order on the bid or offer and then uses algorithmic intelligence to identify the ideal time to aggressively cross the market.

Rather than holding an order book of resting liquidity, PDQ ATS enables liquidity providers to respond to order flow via proprietary algorithmic trading. Orders that are not fully executed at PDQ can take advantage of PDQ’s custom routing strategies and deep network of both dark and lit liquidity sources.

The model recreates the attributes of the physical markets as they existed before electronic trading, when a broker would work the order while keeping track of sudden market swings.

“If we can’t find liquidity needed to fill an order, we work with liquidity seekers on custom routing strategies, such as deciding which other venues to go to and at what price,” O’Malley at PDQ ATS said. “Our 20 milliseconds pause, custom routing strategies and the fact that we don’t have a resting order book makes us unique.”

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