Alongside randomised (or ‘algo wheel’) execution, buyside firms are seeking out a new breed of liquidity provider that can noiselessly absorb block trading parent orders
The traditional process of order splitting in equity execution is beset with problems of risk and information leakage that imposes significant trading costs on the buyside. Panellists at the FIX Trading Community’s France event in Paris spoke about their efforts to deal with the problem.
For Eric Heleine, the outgoing head of trading at Groupama Asset Management, the problem lies in the proliferation of trading venues and market makers that allow predators to pick off buyside orders. The solution is to filter out – or disintermediate – a swathe of market participants. “We’re working to disintermediate the flow, to avoid to introducing information leakage for large blocks”, Heleine explains.
In practice, this involves either disguising trading intentions using randomization (so called ‘algo wheels’) or selecting specific liquidity providers, depending on the context.
“On the equity side we introduced a new waterfall decision-making process, to identify is whether to trade versus risk price, or to trade inside the markets with some wheels and some liquidity tools”, Heleine explains. “We introduce smart analysis to identify the best outcome – between going directly to a stream that we receive in the back end, going to the market through automation or through manual trader execution.”
A new kind of sell-side firm has emerged to satisfy such demands. The idea of electronic liquidity provider-driven systematic internalisers (ELP SIs) isn’t new, but algorithmic trading firm XTX Markets says it is now able to absorb parent orders on a bilateral principal liquidity basis that otherwise would be routed to the market in a sequence of child orders.
According to Geoffrey Damien, head of France for XTX Markets, “In this new type of workflow, the ELP SIs interact with the parent order at the wheel level, so before it even reaches the broker algo. How does it work? Well, it’s pretty simple and totally automated. The parent order would be checked against the ELP SI quotes, in this case, XTX quotes, to see if there is a chance for the parent order to be executed in one clip. If not, the parent order will continue its course, and go through the usual broker workflow. So I guess it’s a free option for the buyside.”
Damien claims that for selected trades, XTX Markets can absorb entire parent orders with no impact.
“It won’t be split into multiple child orders and being executed on multiple different venues. That means from a market impact perspective, we are able to provide bespoke liquidity. What I mean by bespoke is potential price improvements, higher, sizes, better presence time, and also better market impact. Because at the end of the day, the parent order will only interact with one counterpart, which will be less signaling in the market and implicit costs.”
For Eric Heleine, the possibility is of a virtuous circle for the buyside. “The level of automation is increasing because the quality of the inputs is increasing as well. That offers us to have more agility and systematic trading, and new market participants are feeding this.”
©Markets Media Europe 2024
