PDQ Courts Buyside With New Institutional Business

In courting institutional traders, the venue looks to grab slice of block trade pie

PDQ ATS is looking to get into the institutional trading business and has started an institutional equities group in order to get the buyside’s business and its bigger trades. And it has hired two new ex-exchange pros to help get the new venture going.

PDQ has always been a sell-side destination, focusing more on the retail order flow. Now it wants to get the buyside’s orders in via the brokers or directly to be part of the firm’s call auction model, Keith Ross, PDQ’s chief executive told Traders in an interview.

“We want to go directly to the buyside and allow them to participate in our safe liquidity pool,” Ross said. “We can aggregate all types of contra liquidity; HFT and the naturals, and create a market of committed liquidity an order can be traded against.”

As Ross and PDQ see it, the buyside is less concerned about speed of execution and fraction of penny savings on a trade and more about trade size and toxicity, something that the venue offers through the aggregation of liquidity.

PDQ ATS is powered by an algorithm hosting facility and response mechanism that is designed to emulate the interaction and dynamism of traditional floor brokers, while retaining the anonymity and confidentiality of a dark pool. It also offers clients an auction model for executions, where orders are held up to 20 milliseconds to create an auction book. Then order responses are prioritized on a price-time basis. Then after 20 milliseconds the trade is executed against the new auction book.

It’s the 20 ms auction model that Ross and PDQ are heavily advertising to the buyside. As Ross tells it, that 20ms pause while the order book is being built mitigates the “hit-and-run” speedy trading tactics of the high-frequency traders by making them commit their orders first.

“We’ll be able to build liquidity during the pause,” Ross said, “as it mitigates the speed race for the HFTs and places the emphasis on size improvement.”

PDQ’s current trade size is 450 shares.

Total dark pool market share in 2012 was 14.3 percent, according to Rosenblatt Securities. It is expected to have climbed even more in 2013, as more buysiders shy away from the lit exchanges due to the HFT’s presence there, hindering its search for blocks of stock.

As part of the ATS’ drive to bring in more buysiders and execute more blocks, it has brought on two former senior NYSE execs to help build a client book. Peter Jenkins and James Ross joined last week as part of the firm’s push into the institutional equities business.

Jenkins joined PDQ from AX Trading Group, where he served on the board of directors and as president where he oversaw business development and institutional sales. Jenkins, a veteran with 30 years of financial experience, also ran NYSE Euronext’s institutional relationship management effort and served on the management committee. He was also head trader at Scudder Stevens and then at Deutsche Asset Management.

James Ross, a 25-year veteran, also came from AX ATS where most recently served as chief operating officer. Prior to that, he was CEO of an enterprise equity crossing business called MatchPoint Trading, which was acquired by NYSE Euronext to replace its legacy equity crossing facilities. At that time Ross joined the NYSE to oversee the exchange’s electronic non-displayed crossing operations and business. Before that, from 1989-2003, Ross ran Instinet’s global electronic crossing businesses and later spearheaded Instinet’s global institutional sales and relationship management division.

Both Jenkins and James Ross report to chief executive Keith Ross.

Jenkins and James Ross have been meeting with the buyside via roadshows to get the word out, educating clients on PDQ’s unique market structure designed to leverage the HFTs that reside in the venue as well as its natural order flow. The key, as Ross, Jenkins and Ross see it, is getting the buyside comfortable with the electronic and auction system that up until recently was retail-centric and going from there.

“We’re starting from scratch,” Jenkins said. “Over the last month-and-half, we’ve been working with institutions find where the industry is and confirm what their demands are. Then, we’re going to start building out the platform. What we build will be multi-faceted and offer multiple solutions to our institutional clients, both on the buy- and sell-side.”

Jenkins said PDQ is currently building out its trading platform and it is being “fine-tuned.”

While the block is important to the buyside and thus PDQ, it is not the core mission of the new institutional group, Jenkins added. Not all trades are executed and in blocks and thus PDQ’s desk must be able to provide non-block liquidity quickly and from a variety of sources.

Also, James Ross told Traders that aside from offering multiple sources of liquidity, the institutional group will also focus on the market impact side of a trade, not just cost. Institutional players, he added, are very concerned about controlling information leakage and gaming.

“Every order and trader has a different strategy and we know finishing up a trade is very important,” Ross said. “We want our clients to know there will be full transparency and disclosure for all. Traders will get to make decisions on how to execute their trades, whether it’s by choosing the contra or execution system. The buyside should be able to control the market, not the market maker.”

To that end, Jenkins added that his institutional desk’s job is to assist institutions get the best executions whether through natural and other liquidity sources, via PDQ’s auction system or its electronic offerings.

“There are lots of ships passing in the night, and institutional crosses are great when you get them, but it’s a low hit rate when that happens,” Jenkins said. “We want to bring in multiple sources of liquidity and allow the buyside to interact with them – either through our electronic offerings or PDQ’s auction system.”