KCG’S Susi, Bulthuis Discuss Tick Pilot


Being an executing broker/financial technology company isn’t easy these days in the ever-evolving equity market structure.

Just ask Charles Susi, co-head institutional equities and Brian Bulthuis, head of quantitative research client execution services at KCG. The electronic trading executives recently discussed how the firm altered its trading technology to cope with the nascent Tick Pilot Program.

The Tick Pilot program, initiated by the U.S. Securities and Exchange Commission and officially launched Monday, October 3, is designed to evaluate whether or not widening the tick size for securities of smaller capitalization companies would impact trading, liquidity, and market quality of those securities.

The total number of securities will be fixed at 3,000 names and Finra has already assigned the securities for each of the three test buckets, roughly 400 securities in each bucket. The control group will have 1,800 securities in it that will trade under existing rules or at one cent increments and possibly in sub-penny increments.

The three test buckets will trade in nickel or 5 cent increments. Test Group A will trade under existing rules and can trade within the spread. Test Group B symbols will trade only in 5 cent increments and I certain cases only, with exceptions. The last group, Group C, will trade in 5 cent increments as the other test groups but subject to a “trade-at” provision.

The Pilot will last two years.

Given the scope of the program and its myriad moving parts, Susi told Markets Media that KCG took on the Tick Pilot as a company-wide project, with dozens of traders, technologists, quants and others across the firm contributing to making sure the firm’s algorithms, smart order routers, etc were up to the challenge the Pilot presented.

“We really took a comprehensive approach when it came to getting ready for the Pilot,” Susi said. “We had the data , technology and infrastructure but needed to build and test the functionality before the actual Pilot start date. We wanted to assure clients that we optimized the entire algo suite and routers and took a sophisticated approach to be focused on more than just complying with the Pilot.”

So what did KCG do exactly?

As Brian Bulthuis explained, the firm took several months to alter its routing optimization, developed predictive behavior models for spread movements of symbols and even made stock specific tuning to ensure the firm built development and testing models that would help maximize resources.

We wanted to focus not just on getting the compliance right but also on achieving the best trading outcomes,” Bulthuis explained. “We drew on our firm’s extensive market microstructure knowledge, and took a sophisticated approach across our entire execution platform – algorithms, SOR, trading desks.”

The firm re-examined the Pilot’s changes and how they would affect market structure and the potential impact on areas such as market forecasting, venue performance, liquidity, fair value models, order types and each algo at every urgency level.

Among the principal changes to its trading platform, Susi and Butlius said that market forecasts such as spread and quote size curves were updated to reflect anticipated stock behavior. Also venue allocations were re-optimized to account for expected liquidity changes and that strategic liquidity add and take decisions changed to be sensitive to likely changes in midpoint liquidity levels.

Also, Buthuis’ team created new fair value models that were made responsive to expected new market dynamics – such as

–       Trade-At ISO orders used to maximize liquidity capture

–       Block-size exemption trading tactics for Test Group 3 stocks

–       Time-of-day specific trading logic to account for increased difference in behavior toward the close

–       Stock-specific tuning of trading strategies as some stocks in the pilot will be affected more than others

In its algorithm suite, KCG Fan uses Trade-At ISO order type to increase liquidity capture. Covert now has the ability to seek block-size exemption trades. Oasis, the firm’s small cap tool, saw updates of market forecasts to ensure its continued effectiveness. For Catch, its discretionary liquidity tactic was l be tuned for a likely increase in midpoint liquidity in many Tick Size Pilot stocks.

For the baseline VWAP, TWAP, and POV strategies, the programmers re-tuned trading tactics to minimize spread cost, which will be particularly important in Tick Size Pilot stocks. Target Close will be cognizant of significant changes in historical norms in many stocks near the close.

“Coupled with all of this we made sales calls, held events and engaged in presentations to prepare our clients,” Susi said. “At the end, we wanted to make the Pilot a seamless transition for our clients and make it so they are not leaving any trading opportunities on the table.”

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