Cowen Algo Seeks Blocks


Those who seek shall find. And with the help of Cowen & Co’s newest algorithm, block liquidity.

The buy-side for years has lamented its inability to find large blocks of stock – either due to HFTs picking them off, fragmentation or a broker’s lack of market reach – and will employ electronic or human means to find a natural fill. Now, traders are getting a new electronic strategy from Cowen & Co. for those who prefer to work their order in the dark pools.

Enter Block SEEK.

Jennifer Hadiaris, Cowen & Co.

Block SEEK is an electronic dark block liquidity seeking strategy that uses conditional orders, which Cowen has recently implemented in other circumstances. Block SEEK users will be able to simultaneously access 10 dark pools with conditional orders, continue to work their order at additional dark pools with higher minimum quantities and directly route to the market’s newest exchange, IEX.

“The strategy is meant to target block liquidity, minimize information leakage, and help manage the work flow of direct-routing order flow to several different block venues,” explained Jennifer Hadiaris, Cowen’s Global Head of Market Structure.

So how does it work?

The underlying technology is called SEEK1, the firm’s dark liquidity seeker, which will only execute at midpoint or better. The algo accesses 17 dark venues via SEEK and traders can set which venues it looks at.

The algo’s resting dark liquidity is routed in conjunction with the firm’s dark heat map technology. Resting orders are set at a default 1,000 share minimum but can be customized to the trader’s specific needs.

“This means that we will rest orders in the pools that have had more market share in that name or subsector in the most recent FINRA dark pool data,” Hadiaris explained. “As we see fills in that symbol throughout the life of the order, or over the day, that fill information will supersede the heat map. So, we will overweight the venues where we have been seeing the most success finding a contra-side.  This fill-based learning continues throughout the day, so it will persist if a client re-loads an order or anyone else using Cowen algos has traded the same symbol using another strategy that day.”

Conditional orders will rest in 10 ATSs, representing up to 100% of the order in each venue. These 10 ATS also represented over 60% of total block executions (>10,000 shares) in ATSs in Q1 2017. Conditional orders will have a minimum execution quantity of 1,000 shares or higher, depending on the size of the parent order.

“Conditional orders solve the problem of allocation by allowing the strategy to post up to the whole parent order quantity to multiple venues at the same time without the risk of over-execution,” Hadiaris said.” This increases the opportunity for executing in larger blocks. When using conditionals via algorithms, the order can continue to work elsewhere via the underlying algorithm, while also having the opportunity to participate in larger block executions.”

Also, the algorithm can be tailored to include a direct order routing feature that goes to IEX. Hadiaris and Cowen have received many inquiries about connecting to the new exchange and in a bid to accommodate these requests, have included a setting that taps IEX. By default, Block SEEK will rest 10% of the order in IEX using the D-Peg order type and a minimum execution quantity of 1,000 shares. The percentage in IEX is also customizable.

“We continue to receive client requests for direct-routes to IEX, utilizing IEX’s D-Peg order type, and it doesn’t appear that these requests are unique to Cowen,” she explained. “IEX was around 2% of total volume in Q1 2017. However, in certain names intraday, we will see IEX executing 15% to 20% or more  of total volume. When we see this, our first thought is that it may be a result of a direct-route order resting in IEX, and we can flag this to clients in the event they want to directly route an order to IEX.  You can spot names where IEX is over-weighted intra-day using their TOPS feed or Bloomberg.”

So, by using the IEX Direct Route logic, traders can access IEX at the same time that they utilize conditional orders, so they have the maximum amount of destinations at their fingertips to execute a block. Now it can all be done via a single strategy instead of using multiple algos.

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