Tapping the Brakes on High-Speed Trading
With equities markets characterized by low latency, high-speed trading, there is some sentiment toward slowing things down a little.
IEX, for example, has created a 350-microsecond travel time between the point where orders are received and the point they hit its matching engine by coiling miles of fiber at each end.
Another example is PDQ Enterprises, developer and operator of the PDQ Alternative Trading System, whose auction model features a 20-millisecond pause during which algorithms respond with their most competitive quotes, building a book where the responses are prioritized on a price-time basis. After 20 milliseconds, the trade is then matched against that book.
“The world has become dispersed and fractured, in that it’s a lot of child orders being chopped up by algorithms and sent all over the place,” Keith Ross, CEO of PDQ ATS, told Markets Media, “By using the pause, we can solicit the liquidity to come the order rather than having to send the order around. We create unique liquidity on demand, so when the order comes to us we initiate the auction, we aggregate the liquidity, and we trade the original order against the liquidity. That’s an element that’s been missing in the marketplace, both the ability to aggregate liquidity, and the ability to respond with, significant liquidity to the request for trade.”
PDQ volumes exceed 1% total market share, with average daily volumes about 90 million to 100 million shares. “We are starting to get some nice traction,” Ross said. “We had our first million-share day just recently with institutional trades. We are excited about our ability to both create an auction and aggregate liquidity to the order, rather than having the order run around to find the liquidity.”
Although PDQ was initially principally focused on the sell side, in 2014 it hired an institutional team to specifically focus on institutional buy-side traders. “Our pause and auction model allows us to aggregate unique liquidity on demand for each institutional order that we get,” said Ross. “We’ve got about a dozen institutional firms that are routing flow, and we’ve got another 15 or 20 in the pipeline to bring out in the next quarter, and we are out there telling our story to literally hundreds.”
PDQ last year launched Auction1, an electronic equity auction created specifically for larger sized orders. The 1 identifies the length of the auction – up to one second. Auction1 allows for the matching of orders with different latency sensitivities.
PDQ recently launched connectivity with Instinet’s Newport platform, a popular buy-side EMS. “Since so many institutions come though Instinet and use Newport, this is a logical place for us to have the ability for them to have access,” Ross said. “We currently have several other front ends; clients can reach us through REDI, Bloomberg, Fidessa and we are building out other platforms that we’ll announce in the near future. A lot of our sell side comes to us through similar type front ends but they are not as extensive as the EMSs and OMSs that the institutions use.”
Featured image by Oleksiy Mark/ Dollar Photo Club
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