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Empowering the Buy-Side Trader

This is the second part of a sponsored series from CODA Markets. The first was a chat with Don Ross, CEO of CODA parent PDQ Enterprises.

Traders Magazine Online News, December 18, 2018

John D'Antona Jr.

The trader who trades best, helps himself.

The institutional trader searches for the best data, broker, venues, order types and the list goes on and on until actual execution. But what about his actual tools? How does he find them?

Having the best tools available allows a trader to maximize  alpha and execute trades in the most efficient manner, while minimizing adverse price selection, information leakage and slippage. While much has been made about the evils of predatory traders when it comes to protecting investor interest and how they are almost unbeatable despite regulators’ efforts and exchange-based speed restrictions, traders still need to look after themselves. [IMGCAP(1)]

So, what if the buy-side took matters into its own hands?

Don Ross, Chief Executive Officer at PDQ Enterprises, parent company of CODA Markets, told Traders Magazine that instead of waiting for either the Securities and Exchange Commission to issue new regulations and find a silver bullet, or - as doubtful as it seems - having exchanges focus on the buy-side’s needs over those of high frequency trading firms that often are their source of liquidity, traders need to proactively come up with their own solutions.

In other words, the best defense is a good offense.

“The fact is, investors can quickly improve their competitive position - bringing better fills and stronger performance - by taking just three steps,” Ross began.

First, buy-side traders can set new benchmarks. Ross argued that while VWAP is widely used it's a failure as a benchmarking tool.

“It does little to tell you if you got a good fill based on where the market was when you decided to buy or sell; it only tells you if each of the pieces you broke your larger trade into were executed acceptably,” he said. “It all starts with the benchmark.”

And the problem is that VWAP doesn’t tell a trader anything until he starts to actually trade and create a history. So, a trader’s first orders are done “in the blind” and nothing is known beforehand about potential market impact. Ross advocated using either a type of liquidity protection rule (LPR) calculator, which itself is a pre-trade benchmarking tool available via select vendors and CODA, or its own block auction process – CODA Block.

“The LPR helps safeguard a trade by adding limit up/limit down protection on a symbol by symbol basis,” Ross explained. “This is a great place to start as it anticipates where you could go.”

Add to this the CODA Block auction – which conducts a 30 second auction that includes issuing symbol-only alerts while gathering bids and offers both inside and outside the NBBO. The trader can use this as a means of price discovery and control just what he wants to do and perhaps place a more aggressive order.

“The goal here is have no stupid looking prints,” Ross chimed.

And the buy-side agreed. It wants to get the best trading experience and not be subject to extraneous forces.

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