Which are your top 3 "DARK" algo providers?
4
The list of 20 suppliers has been filtered down to top 11 for illustrative purposes
td.
ing L
Virtu
ight:
r
Copy
Therefore, the industry needs to find a new way to measure
the value of a block trade. At Liquidnet we have developed a
model called “Value of the Block” which uses the sum of three
clear metrics; spread, market impact and incremental Alpha
as metrics for evaluation. This model is open, transparent and
uses metrics freely available to all market participants.
Firstly, spread: The vast majority of executions on the Liquidnet
platform, including human-negotiated trades, occur at the
midpoint, therefore saving the participants 50% of the spread.
This is the first significant saving of trading a block.
Secondly, market impact: Executing an order via a single large
block, in a dark venue with natural liquidity exhibits very little
market impact (as highlighted by the price movement statistics
quoted earlier), therefore it is fair to say that block trades save
the participants the equivalent of the pre-trade market impact
estimate. At Liquidnet we use our own internal market impact
model based on the Almgren model, which is commonly used
across the industry, even though any pre-trade model may also
be used.
Finally, incremental Alpha: Executing in a single block trade
means the quantity does not have to be executed in the
market over x number of minutes, thereby reducing any timing
risk that may exist. This risk can be measured using a PWP at a
certain percentage. Our default calculation is 10%, highlighting
the out or under performance vs. this realised price.
Combining the three measures gives a single basis point and
dollar number that can be used to quickly and easily ascertain
if trading the block was the right thing to do. As an example,
the largest LIS execution in October (103m USD of EXPN.L)
saved 2.5bps of spread, 32.2bps of market impact and 92.8bps
of timing risk, with an expected duration of over 19 days.
How do blocks improve algo performance?
Blocks will not be appropriate for every algo order, however,
when trying to achieve the arrival price, either via dark
Winter/Spring 2020
K&K
ult
Cons
l
a
b
o
Gl
aggregation or a liquidity-seeking strategy, then trying to find
block trades can be beneficial.
We analysed all Liquidnet dark and Barracuda orders between
1 st July 2019 and 31 st October 2019 to see what difference
block executions had on performance vs. arrival and the results
were striking.
Orders that executed >75% of the total order notional as LIS
executions outperformed the arrival price (mid) by 1.65bps.
Orders that executed <75% missed the arrival price by
-2.12bps 3 .
Due to the full access Liquidnet Dark and Barracuda have
to the block market, i.e. connected to all four of the main
conditional venues (Liquidnet, CBOE LIS, Virtu Posit and
Turquoise Plato Block Discovery Service), these algorithms are
fully exposed to the opportunity of block executions.
The performance of these algorithms was recently recognised
in a poll produced by K&KGC 4 which highlighted Liquidnet
Dark as the most popular dark aggregation algorithm by
buy-side traders across Europe. Barracuda was also in the top-3
liquidity seeking algorithms.
Happy hunting
With a robust model to measure the quality of execution
and whether LIS block trades achieved Best execution now
available, the hunt for LIS blocks is sure to continue. It is
therefore important to ensure you’re fully exposed to the block
opportunities that exist via your execution tools, in order to
find liquidity and achieve Best Execution.
1
Liquidnet Analysis – Bloomberg dark MTF, on-exchange executions, 1 st – 31 st
October 2019
2
Source: Big XYT Liquidity Cockpit – January 1 st to October 31 st 2019
3
Source: Liquidnet Dark and Barracuda algo orders between 1 st July 2019 and 31 st
October 2019
4
Source: K&KGC, The Buy-side Perspectives 2019 The top 3 equities algorithmic
trading brand preference ranking – December 2019
www.buysideintel.com
21