Dark Orders for Day Traders

Terry Flanagan

When it comes to dark liquidity, all is not black and white.

New trading venues are providing dark order types that cater to all types of traders.

PDQ, an alternative trading system (ATS), 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.

“The functionality AlgoSuite provides has been used by high-speed electronic traders through their proprietary trading systems,” said Keith Ross, chief executive of PDQ ATS. “We are recreating 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. It allows the manual trader to capitalize on rebates when possible, and remove liquidity when necessary.”

The move away from the lit market “has in many ways been negatively connoted and vilified”, said Travis Felker, vice-president of research and development at Cyborg Trading, a trading systems provider.

“I believe this to be unfair and a bit of scapegoat,” he said. “The facts are that dark pools are very competitive; they reward the initiated and the innovative, and decrease the cost of trading for nearly everyone. The U.S. equity landscape is ever changing, but is constant in that those who can adapt tend to thrive.”

Cyborg Trading’s institutional platform, Cloud Trader, has an ‘execution blueprint’ which specifies order execution parameters.

“A drag-and-drop interface empowers the trader to assemble sophisticated order execution logic and is connected by events without the need for any programming or scripting,” said Felker.

“This way traders can build out their executions exactly how they want, as opposed to paying for a SOR [smart order router] that only does a fraction of their intended idea.”

PDQ is “essentially a baby stock exchange”, said Ross at PDQ. “Our unique twist on market structure is that when customers looking for liquidity send us an order, we physically pause their order for 20 milliseconds,” he said. “When you introduce a pause, it separates the speed demons from the traders who are non-latency sensitive, and allows us to get an order filled with better execution, while eliminating issues with fast markets and high-frequency trading.”

As an ATS, PDQ can only deal with broker-dealers, including day trading arcades, and agency broker-dealers. “We have 75 broker-dealers who are subscribers, 85% of whom are seeking liquidity and 15% are providing liquidity,” said Ross. “The liquidity seekers typically think that the 20 millisecond pause is fast, while the liquidity providers think it’s slow.”

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