Cover Story: Keeping Watch
Traders Magazine, May 2012
It gives me flexibility and some control over who Im transacting with, he said. If I dont want to trade in a particular quadrant, I dont have to.
While Morgan Stanley and Barclays wield a big stick when policing their pools, Deutsche Bank takes a more live-and-let-live approach. The broker does not threaten its HFTs with expulsion. Rather it counsels its buyside customers to allow its algorithm to decide when to trade and when not to trade with a potentially dangerous counterparty.
Marques maintains its a mistake to unilaterally block out trading with any single player or venue. In the past, clients that have done so, have found themselves cut off from very significant amounts of liquidity.
See Chart: Bulge Bracket Dark Pools
Theres a time when its perfectly fine to trade with someone you might consider a toxic counterparty, Marques said. And thats when you have an informational advantage. And, of course, there are other times when you definitely want to stay away.
In general, Marques explains, its best to trade very stealthily when starting out with a fresh order, avoiding HFTs. But after completing about 60 percent or 70 percent of the trade, a trader can use his informational advantage and take liquidity aggressively.
The dark pool ranking model is telling us which sources are benign across volatility and capitalization bins, both internally and externally, Marques said. So in the beginning, a participant will trade conservatively, and wont leak information into the marketplace. But, as the trade evolves, the tactics might change to more aggressively seek liquidity from a broader cross section of sources. This is what good traders have historically done.
The difference now, Marques added, is that Super-X Plus can do what a person cannot, that is manage this process dynamically across fifty plus venues.
So what do the market makers think of all this? At least one HFT executive is enthusiastic. Id like to see the whole marketplace doing this, Chris Concannon, a partner at Virtu Financial, a registered market-making firm, told Traders Magazine. Its the next wave of change and evolution. Its an expansion of transaction cost analysis. Now, were going to do TCA at the counterparty level. And Im okay with that.
Concannon says he welcomes an analysis of the way he provides liquidity. Tell me how I do, he said, and Ill adjust. We provide customized liquidity. I can go bigger. I can narrow my spread. I can do mid-point. We have very customizable liquidity. So, I want to be scored. Everyone should be scored. We are headed into a world of TCA on steroids. And its a good world.
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