06.16.2015
By Terry Flanagan

Tick-Size Pilot May Bifurcate Equity Market

The U.S. equity trading landscape may be structurally disrupted into a bifurcated marketplace as a result of the tick-size pilot, with implications for algorithmic trading.

Users of algorithms will require electronic products and analytic tools to efficiently trade the 1,400 securities that will comprise the SEC’s recently approved two-year pilot program. The program, which will begin by May 6, 2016, will widen the minimum quoting and trading increments for stocks of certain small-cap companies to test for long-term changes to trading these stocks.

“We’re going to have a bifurcated market, whereas today we have a one-size-fits-all market,” John Cosenza, co-Head of Cowen/ATM, told Markets Media. “When the tick size pilot program goes into effect we’re going to have different rules and structure for the pilot securities along with the existing structure as exists today for the rest of the securities.”

Cowen is investing time and resources into supporting the pilot program and offering solutions for clients.

The tick size pilot will include stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or less, and a volume weighted average price of at least $2.00 for every trading day. The pilot will consist of a control group of approximately 1,400 securities and three test groups with 400 securities in each selected by a stratified sampling.

Cowen/ATM, a provider of broker neutral and execution algorithms, is working closely with clients to develop products to efficiently trade the securities participating in the pilot program and enable the SEC to draw as many meaningful conclusions as possible.

“Regulators have worked tirelessly to develop a pilot program aimed at helping to evaluate ways to improve trading liquidity for smaller companies, and now it is our job to develop appropriate products that will be available for clients starting on day one of the pilot program,” said Jeffrey Solomon, president of Cowen Group and co-chair of the Equity Capital Formation Task Force, a group dedicated to supporting the country’s startup and small-cap company ecosystems, in a release.

The company is speaking with institutional clients, technology partners, exchanges and alternative trading systems to ensure that it’s creating products that incorporate feedback across the ecosystem.

“Products that address the small-cap pilot program will be an important component of our overall product suite,” Cosenza said. “We envision new execution strategies, optimization of models and routing of existing products as well as tailored execution analytics for the pilot securities.”

Cowen entered electronic trading in 2012 through the acquisition of Algorithmic Trading Management (ATM). At the time of its acquisition by Cowen Group, ATM was one of the largest independent providers to the sell-side.

The Cowen/ATM electronic business consists of execution algorithms, routing strategies, portfolio trading and analytics products.

“We have no proprietary trading, we have no electronic market making, and we don’t operate a dark pool,” Cosenza said. “We accept no payment for order flow. The only way that we make money is by delivering quality execution products, algorithmic software, execution quality and service around it.”

“We have no proprietary trading, we have no electronic market making, and we don’t operate a dark pool,” Cosenza said. “We accept no payment for order flow. The only way that we make money is by delivering quality execution products, algorithmic software, execution quality and service around it.

In 2013, Cowen/ATM unveiled a predictive analytics product Best Execution Switching Technology, which has since become one of its flagship products. “We built a product that we thought would be extremely optimal for trading illiquid wider spread securities,” Cosenza said. “At its core, it switches from algorithmic tactic to tactic based upon the expected cost of the trade, some user inputs and a predicted future price movement of the stock.”

He continued, “We want to collect at lot of external feedback and have a lot of conversations with clients and assemble that feedback into the best products and processes for, what’s going to be a new structural component to the marketplace.”

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