Chaperoning Liquidity Seekers
Electronic trading pros latest gambit
May 2008
The problem: a shortage of displayed or available liquidity for institutional traders. The solution? Encourage wary liquidity providers to post large markets by making executions as likely as possible.
PDQ Enterprises, a five-year-old technology company founded by a former chief technology officer of the New York Stock Exchange, is setting itself up as a kind of dating service for liquidity providers and takers. The idea is that the shy party-the liquidity provider-can be encouraged to respond to the party seeking liquidity if there's proper chaperoning and sensitive information on both sides is safeguarded. If interest transpires, PDQ, which stands for Procedure Derived Quotes, ships the orders, independently but in tandem, to the desired exchange or ECN for a potential consummation of the trade.
PDQ's ambitions are big. "We will make liquidity in the market," says founder Christopher Keith, CTO of the NYSE in the 1970s and 1980s and a serial entrepreneur. "We will create an electronic trading crowd that will bring liquidity back into the market."
Prime Time
The displayed markets are listening. PDQ, which expects to launch by the end of June, recently connected to NYSE Arca and BATS Trading. It's in the process of connecting to the NYSE, Nasdaq and the ISE Stock Exchange. And PDQ expects to be a destination on several buyside order management systems by midyear. These efforts come at a time of intense competition between market venues, accompanied by aggressive efforts from some dark pools to snatch liquidity before it reaches the markets.
The latest signal that PDQ is ready for prime time comes from Wedbush Morgan Securities, which recently signed on as the firm's sponsoring and clearing broker. "We have expertise clearing super-high-volume brokers," says Gary Wedbush, executive vice president and head of capital markets at the broker-dealer. "PDQ is right in our power alley." Wedbush clears for BATS Trading and several large automated market-making firms. The firm will act as the broker-dealer for transactions routed through PDQ.
A primary difficulty buyside traders currently face is the dearth of immediately available liquidity, says D. Keith Ross Jr., a former chief executive of GETCO, a large automated market-making shop, who joined PDQ as CEO in 2005. A firm that wants to buy shares in a stock that's not one of the top dozen names will see a nominal displayed quote, maybe a couple thousand shares bid or offered, with a spread a penny or two wide. "If you're trying to do more than a few thousand shares, there's no simple way to request liquidity," Ross says. "You can go check the dark books, run around to the ECNs, go through a hunt-and-gather process to find liquidity." But, he adds, "there's no ability to say, in a high-speed electronic fashion, to people who want to provide liquidity: What is your market now?"
PDQ's plan to solve that problem is relatively simple, Ross says. It will function as an order-routing firm, but one with a lot of sophisticated technology behind it. David Padgitt, the firm's chief technical officer, who oversaw the system's development, helped design and implement the first real-time options trading system at Hull Trading in the late 1980s.
20 Milliseconds
Once PDQ is up and running, liquidity-seeking firms will route marketable orders to PDQ, where they will be paused for 20 milliseconds, before being sent on to the exchange or ECN of their choice. While the orders are paused, liquidity-providing firms whose algos reside within PDQ's facility will respond to requests for liquidity. They will either price-improve the national best bid or offer or add size to the quote at the market where the original order is heading. If new liquidity is generated in this way, PDQ will route the liquidity providers' orders to the destination venue just ahead of the liquidity taker's order.
For more information on related topics, visit the following:
