Being in control is at the heart of trading.
With so many extraneous variables affecting the equities markets daily – and even by the minute – traders look for every edge and advantage they can find when routing their orders and searching for liquidity and alpha. Not to mention without giving up their intentions and exposing their order books, traders are often at the mercy of the markets.
But enter OneChronos Markets, a wholly-owned broker-dealer subsidiary of OCX Group. The firm is an independent, venture backed company using cutting edge technological paradigms to enable the next generation of electronic trading. Its new and soon to be opened U.S. equities ATS is designed from the bottom-up to fundamentally address the growing gap between how exchanges & dark pools match trades and how traders think about execution.
According to Kelly Littlepage, Stephen Johnson and Richard Suth, Co-Founders of OneChronos and former Goldman Sachs and Accenture alumni who all spoke to Traders Magazine, said the ATS employs cutting edge artificial intelligence to achieve their common dream of leveraging domain expertise and emergent technologies to make the trading experience more efficient, profitable and clandestine for the buyside.
Most equities market stakeholders agree the “arms race” in today’s market structure creates added frictions, operational risk, and asymmetry in trading opportunities based on speed. Effectively a series of growing “toll-gates” we all pay to trade. Most don’t agree, OneChronos executives said, on the route cause, and ways to address that problem.
“We at OneChronos felt typical “answers” such as speed bumps, special fee structures, and tiering are all small forms of segmentation, basically therapeutics to numb the pain, where addressing the mechanism design of the exchange auction itself is the vaccine,” said Jesse Greif, Chief Operating Officer at OneChronos.
And that is central to OneChronos’ strategy — its point-in-time auction functionality, which attempts to become a “smart market” by using optimization techniques to match counterparties and determine clearing prices. How? The proprietary technology process seeks to maximize price improvement and crossing opportunities while providing traders & broker algorithms “expressive bidding” tools to manage their business-specific execution or risk management objectives directly in the match process.
A smart market? What’s that?
A smart market, to hear Littlepage and Johnson tell it, is a design for a periodic auction format that uses optimization techniques such as integer programming to solve for a specifically defined objective. Industries like logistics, telecom, airports (think plane gate allocation) as well as government procurement of physical commodities have all in part adopted the smart market concept given their demonstrated ability to address the aforementioned challenges.
To bring the smart market to equities trading could only be accomplished by taking advantage of advancements in computer science and artificial intelligence, and a relentless attention to mitigating information leakage to make “expressive bidding” something that doesn’t introduce an opportunity cost. This is actually where most of our OneChronos’ core IP lies.
In the OneChronos smart market case, Littlepage said his primary objective is to identify and clear the configuration of “winning” orders which would maximize price improvement across all orders and securities in a given auction. The mechanism is also designed in a way that mitigates information leakage, and, true to smart markets, creates unique crossing opportunities that wouldn’t existing otherwise.
The auction process itself is unique. First, the point-in-time auctions occur every 100 milliseconds throughout the trading day – not just once or on demand as other ATS do. Second, the matching engine makes a match priority based on aggregate notional price improvement contributed. All matches are within or at the NBBO spread and at a single clearing price per symbol.
“We offer traders fully customizable constraints, including those spanning multiple orders or securities, directly in the matching engine; such as dollar neutrality, price/quantity indifference and pairs trading,” Johnson said. “Standard order types are welcomed and supported, in addition to those unique to OneChronos.”
In particular, price/time (match priority) continuous markets challenge the goals of execution, and instigate the complex supply chain that now exists to mask execution, breaking orders up, and randomizing their distribution, he added. These are needed given the current infrastructure but come at a cost of diluting the original execution objectives of the investor.
The goal is to put tools in traders’ hands to convey their business specific execution goals, what OneChronos refers to as “expressive bidding,” directly in the matching engine to avoid unintended risks, and hone in on those which are intended.
For example, a trader wants to buy up to $100k of asset ABC only if I can also sell the same notional in DEF at a defined spread (vs. ABC) or greater. Or, expressing indifference between buying 100 shares of asset XYZ at midpoint or 700 shares XYZ at 80% of the spread all within the same auction.
OneChronos runs approximately 10 auctions per second throughout the full trading day, or every 100 milliseconds.
Furthermore, Littlepage and Co. have been spending time with the buyside to better understand their use of broker algos, which has immensely assisted in them and their partner discussions with the sell side brokers to complement their algo and routing. This offers them further differentiation of their execution suite.
“Though we’re a broker dealer, OneChronos can only be accessed through (other) Subscriber broker dealers,” Littlepage said. “We designed this very deliberately to partner with the existing ecosystem.”
OneChronos has already completed its Series A round of financing and has published its form ATS-N with the Securities and Exchange Commission in the first quarter and looks forward to a fourth quarter launch trading US equities.
“Coronavirus pushed out our plans a number of months, like the case with many other businesses, though gave us a great opportunity to further bake our toolset that we’ll provide to users, simplify our API & logistics experience, as well as create more self-service content lowering the barrier to entry for new users to take advantage of the offering,” explained Richard Suth. “We’re less than a month from having test environments ready to put in front of users. “We look forward to introducing the OneChronos ATS to US equities market structure.”