Liquidnet, the equity block trading pool, and IEX, the buyside- sponsored ATS that wants to help the buyside avoid predatory traders and find the elusive block trade, have joined together to create a new algorithm that will help the buyside find liquidity – anonymously, cheaply and in large size.
The new algorithm and order routing software has been dubbed Liquidnet Dark IEX, and it is designed to provide the buyside with access to both firms’ liquidity pools simultaneously. The new trading formula also aims to help traders execute an order with the least amount of market impact and adverse price selection.
“We are always looking to provide our members with better access and more control over their block orders. Traders can now work their orders safely and securely within both Liquidnet and IEX,” said Scott Kartinen, head of algo products at Liquidnet.
So how does it work?
Liquidnet Dark IEX is a new proprietary routing strategy that exposes each order to Liquidnet’s pool of liquidity while simultaneously accessing liquidity in IEX’s pool. Exposing the order to each venue at the same time serves a twofold purpose: First, it ensures the order stays quiet in the marketplace and away from predatory traders or strategies. Second, the chance of adverse price selection is reduced as the order is sprayed between only two ATSs.
“This is an algorithm that both Liquidnet and IEX put together,” Kartinen said. “It was launched back in June. But we had been in discussions with IEX for a while before that. Both firms looked at doing something jointly as we view IEX liquidity and philosophy as complimentary.”
The algorithm never sends the parent order or child order anywhere but to IEX’s and Liquidnet’s dark pools. If an order cannot be completed at the two, whether in the time allotted or in requisite size, it is sent back to the buyside trader who sent it. He can then modify the order’s parameters and resend it or shelf it.
“Think of it as a precision-strike algorithm that is focused on liquidity in the Liquidnet and IEX dark pools, and will never send an order to a lit market,” Kartinen stressed. “The algorithm also has a dynamic limit price model that protects orders in both pools from short term price spikes.”
One way the algorithm is designed to keep the order at Liquidnet and IEX is a unique protection feature, Mike Capelli, head of Liquidnet’s Algo Services Group said.He explained that as the order is sent to IEX’s liquidity pool, it rests using IEX’s D-Peg order type, which usually trades at the midpoint, but is free to trade between the primary and the midpoint. If the price is in transition, the logic pegs the order to the primary: the bid for buyers and the offer for sellers.
Most of the time, the order is free to trade anywhere between the near-side / primary (bid for buy orders, offer for sell orders) and the midpoint, with the counterparty dictating the level of aggressiveness.For instance, if the spread was 10.00 x 10.02, a D-Peg buyer could trade at 10.00 or at 10.01 — it would depend on how much spread the counterparty was willing to give up.
IEX never adjusts execution prices. Execution prices may vary, depending on the aggressiveness of the counterparty that trades with D-Peg,Capelli added.
The initial discussions between Liquidnet and IEX to create Dark were at the behest of Liquidnet clients that were looking to execute at IEX and yet wanted to maintain their existing relationship with the firm.
“The idea for this algorithm came from our clients – they really see both venues in a similar light, as ideal destinations to safely source block liquidity away from the exchanges,” said Capelli.
At the end of the day, making the buyside feel secure in how orders are handled and where they go is paramount.
“Both Liquidnet and IEX want to help the buyside find and trade blocks,” Capelli added. “IEX is focused on being a continuous market with protective technology driven by clients.”