A growing European appetite for passive investment strategies and index-based investing is driving exchanges to develop their own trajectory crossing solutions. Following Cboe Europe’s BIDS VWAP-X announcement earlier this year, Nasdaq is set to launch a rival product.
A form of algorithmic trading, trajectory crossing uses predictive modelling to place orders that will intersect a stock’s price anticipated trajectory in the future, providing optimal pricing and reducing market impact. The method relies on the fact that stock prices tend to follow patterns, however execution can be adjusted in real-time if the trajectory deviates from its expected path.
Nasdaq already offers its version of the tool, PureStream, in the US and Canada, and its break into European markets has come after demand for trajectory crossing solutions began to grow in the region. “We’ve been looking at this for a while now, and it seems like the interest is there,” Henrik Husman, vice president of product development and head of cash equities in Europe told Global Trading.
The firm’s announcement follows Cboe’s unveiling of BIDS VWAP-X in July, scheduling a 21 October launch for the trajectory crossing service. Cited as a “first-of-its-kind” product, the platform will face competition within three months of its go-live.
Husman believes that Nasdaq’s offering will stand out, despite not having a first-mover advantage. “The main difference is the open-ended nature of PureStream,” he told Global
Trading. “It allows clients to choose the liquidity transfer rate (LTR), which determines the percentage of the future traded in the lit order books that you want to be included in your PureStream execution. So you get to choose the urgency of your trading interest. You get to define it all the way from 1% to 500%. Either you take 1% of a future lit trade volume or you take 500%.”
On top of that, “If you have 50,000 shares to trade, you don’t have to trade all of that at the VWAP of the next 5 minutes”, he explained. “You can determine the duration of your VWAP. We believe this to be highly attractive for many clients.”
By contrast, those using Cboe BIDS VWAP-X “will be able to submit indications of interest which are firmed up as part of a bilateral trade negotiation. Once a match is agreed, we will then calculate a VWAP over the next five minutes by consuming prices from the largest lit venues”, Natan Tiefenbrun, president of North American and European equities, explained to Global Trading. Trades through the platform are reported as off-book, on-exchange, centrally cleared and reported under sub-MIC codes that mark them as trajectory crosses.
Husman also emphasised the value of information leakage-prevention that PureStream can offer, an issue that clients of all these services are looking for. “We’ve certainly paid attention to that,” he affirmed. “Our live implementation in the US and Canada have given us a good foundation for a solid solution.”
“We use reputational scoring mechanisms. On a real time basis, we look at the behaviour of participants in the service. In this service, you send non-actionable indications of interest that we ask to firm up once we have a counterparty. If we then see a lot of behaviour where you don’t actually firm up your IOI and you walk away, then we exclude such participants from the service. With that, we ensure that the service is properly used for trading intentions instead of information fishing.”
On Cboe’s part, “we’re being particularly attentive to the market surveillance and market integrity challenges that any new market model surfaces,” Tiefenbrun assured.
Both firms believe that they are offering something different to the market, each highlighting their established frameworks – Cboe with BIDS Europe’s conditional order workflow and Nasdaq with its established presence in North America, which Husman believes will help the firm’s liquidity build-up in Europe: “A lot of participants are active both in North America and in Europe, so we believe that we will have a pretty good adoption from key participants,” he said.
PureStream users do not need to source liquidity on a single point-in-time basis, Nasdaq explained. Interactions between institutional investors with a shared execution goal are prioritised, and latent algorithmic liquidity is available in line with the volume goals of individual strategies.
Husman and Tiefenbrun expect the trajectory crossing trend to keep on growing in Europe. Greater interest in the strategy has been driven by an increased use of passive investment strategies and index-based investing, Husman explained, “and this VWAP way of trading makes sense in these cases”.
VWAP can act as a support and resistance level for a security, as well as providing insights into its upward and downward trends. It can be used as a benchmark to execute orders and reduce market impact, and can be combined with moving average crossovers to help traders identify entry and exit points for traders.
Beyond one another, Cboe and Nasdaq also face competition from sell-side firms’ own trajectory crossing systems. Husman cited a number of reasons that an exchange-run service could be more attractive, highlighting the benefits of a larger liquidity pool, established surveillance functions and greater real-time transparency for the broader market.
“We operate in a highly competitive environment for all of our services, and while we will be a first mover when it comes to trajectory crossing, we’re of course expecting rival offerings to emerge,” Tiefenbrun stated.
©Markets Media Europe 2024
