Traders Magazine recently caught up withDon Ross, CEO of PDQ Enterprises LLC, the parent company of CODA Markets Inc. Ross is an experienced thought leader in equities market structure and electronic trading, with a strong managerial background in the development and use of innovative trading strategies and software. He holds a B.S. from Northwestern University where he studied Learning and Organizational Change, and today applies modern management theory to optimize the productivity of the creative people around him.
In the interview that follows, Ross shared with Traders Magazine Editor John DAntona Jr. his pedigree, how he came to run an ATS, how it operates and what the future holds in off board trading.
TRADERS MAGAZINE: How did you get started in the business? What drew you to trading?
Don Ross: Initially, it was through my father, who spent his whole career in the industry. I loved the excitement of markets. I was also fascinated by money-not just making it but, particularly after studying economics in college, how capital formation worked and how nations prospered.
In high school, I was fortunate to get an internship at GETCO, which would later become one of the worlds premier electronic trading firms. I loved the place. I actually deferred my admission to Northwestern to trade full-time with them. I cut the hours while I worked on my degree, but went right back to twelve-hour days after graduation.
At GETCO, I got a great education in the importance of technology and innovation in creating competitive advantage, and thats stuck with me. I also became a market-structure fanatic, and started making notes of where I thought technology, rivalry, and regulation were pushing things. I knew the speed arms race had a ways to run, but it was apparent that it was going to become a decreasing-returns game. I wanted to be part of the next big thing.
TM: What prompted you to jump to CODA?
Ross: If it hadnt existed already, I would have wanted to create it-or something just like it. CODAs on-demand auctions made perfect sense to me. With enough computing power, you could have instantaneous price discovery and multilateral executions, but without the gaming, resource-wastage, and information-leakage of continuous markets. Once you eliminate the need for bilateral executions, based on time priority, you arrive at the Holy Grail of economic exchange-the so-called Walrasian auctioneer. This is how perfect, frictionless markets were supposed to work in theory. And thanks to technology, I could now help make them work that way in reality.
TM: Tell us about CODAs philosophy.
Ross: CODAs philosophy is straightforward: to produce better trades by taking the time dimension out of execution. Much of the inefficiency in trading today comes from the need to be a nanosecond faster than everyone else in order to avoid being ripped off. But if you do price discovery and order-matching multilaterally, as we do, costs go down and returns go up. For everyone. Our systems are complex and state of the art, but our concept is simple and transparent.
People arent generally aware, but auction trading only stopped in this country-in 1870, to be exact-because the stock market got too big to hold consecutive auctions in every stock within a normal work day. Continuous trading took over simply because the technology of the time-the human auctioneer-wasnt up to the task. But now? Computers are the perfect auctioneer.
TM: Can you explain some of the specific problems with continuous trading?
Ross: Michael Lewis hit on many of them, without realizing it, in Flash Boys. Its the crazy amount of time and money we spend trying to transact without tipping our hand. On the surface, continuous trading looks like transparency and efficiency, but its not. Any firm that quotes price and volume for a stock is pricing in the cost of displaying that information to the market. Thats how you get tiny, 150-share trades in a market dominated by institutions with 50,000-share orders to fill. It makes no sense.
TM: How does the auction process help traders?
Ross: At CODA, we actually deliver 50,000-share executions with minimal market impact; and we do that without traders revealing anything more than the stock they want to trade. Our auctions aggregate multiple sources of liquidity-not just what electronic trading firms decide to display-into a single print. This is liquidity that would be inaccessible if sought through sequential trades.
For the supply side-market-makers, prop trading shops, and the like-auctions provide the opportunity to trade with natural liquidity seekers without having to pour their hard-earned money, continuously, into the costly speed arms race.
TM: So, how is CODA doing?
Ross: Were particularly excited about our new CODA Block venue. Whereas we do some types of auctions in as little as 5 milliseconds, we allow 30 seconds (yes, seconds) on CODA Block in order to boost participation and liquidity. The system has been doing great, particularly for small and mid-cap stocks-where temporal fragmentation of liquidity is at crisis levels. A recent report by ViableMkts found that CODA Block produced solid hit rates, with little or no information leakage and minimal market impact. How do we do it? CODA counterparties see only the symbol of the stock the initiator wants to trade. Theres no indication of size, price, or even side. After 30 seconds, we aggregate everything and execute all at once.
TM: How do you deal with the perception that certain ATS liquidity pools are infected by toxic participants?
Ross: Thats a great question. Some venues are clouding their reputation with the buyside, as they cant get liquidity providers without giving them an edge-for example, through special products-in terms of intelligence-gathering and faster executions. None of that nonsense is useful in our on-demand auctions. The ViableMkts report shows that were not being gamed, and the reason is that our unique market structure prevents it. No amount of wise regulation can improve market efficiency better than sound market structure can.
