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Brett Cenkus
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Trump Won't Kill America, Bitcoin Will

In this shared piece, author Brett Cenkus argues that nation-states will cease to exist not because of a who, but a what - and it's already here.

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September 30, 2004

Building the Better Mousetrap?

By Peter Chapman

For traders using ECNs, PDQ confers an additional benefit, notes Shapiro. A trader who might otherwise take liquidity from an ECN - i.e., hit bids and lift offers - might find it more advantageous to provide liquidity working with PDQ.

Typically, traders who post orders on ECNs, receive rebates. The payment is to encourage them to accept the risk inherent in exposing their interest. Traders who take liquidity pay the ECN.

But with PDQ, the risk is minimal as long as the order reaches the ECN before the contra, says Shapiro. And PDQ can target precisely where the client's order needs to be - say five cents away from the inside - to more efficiently manage an execution.

PDQ's future is far from assured. The group is struggling to find customers and partners. Execs claim to have support in the market making community, but a recent buyout deal by Archipelago fell apart. Shortly thereafter, the developer's top sales exec, Steve Wunsch, left the firm.

Freezing Time

For Sam Balabon, time should stand still.

The Texas creator maintains traders would be willing to post large limit orders on an open book if the system offered two safety nets. First, allow block traders to peg their pricing to the market's best quotes. Second, prevent them from executing unless the peg remains unchanged for some brief time period.

His Deep Liquidity does just that. While still existing largely on paper, the ATS is an open book designed to help money managers move large blocks without leaking information. Large blocks have virtually disappeared from public display since the minimum trading increment dropped to one cent from 6.25 cents with decimalization in 2001.

"The Deep invention is like freezing the market and placing an order at any point in a frozen market," explains Balabon. "It is like trading when all the markets are closed and all prices are fixed. This allows the buyer and seller to successfully trade between one another without any information leakage."

The Houston-based Balabon, a relative newcomer to the securities industry, is currently developing the Deep Liquidity software, applying for broker dealer status and seeking financing. Balabon is an entrepreneur who has applied technology to business problems in the past.

Deep Liquidity's time delay feature is intended to ward off market impact and slippage. Under normal circumstances, a large order appearing on a public order book can cause prices to move.

Penny jumpers and other predators buy stock or out-bid the block trader. Ultimately, the block trader executes at a price that has slipped from where it was at the time of order entry.

Traders who penny large blocks figure that even if the stock does not move they can always unload their shares with the size buyer at only a small loss. The practice has grown since decimalization turned the displayed block into a free option for sharks.

Balabon maintains that if the market's sharks are aware that a given trade won't go off unless the price remains static for some time period, they are less likely to bite. The option value of the block becomes less free because there is less certainty a trade will actually occur or, if it does, at what price.