THETRADETECH DAILY
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1 . The TRADE 2021 Algorithmic Trading Survey - https :// www . thetradenews . com / the-trade-magazine-spring-2021 / 2 . Virtu European Market Landscape February 2021 - https :// www . virtu . com / uploads / documents / Virtu _ EuropeanMarketLandscape _ February2021 . pdf 3 . Big XYT – _ Liquidity Trends since July 2016 – _ Lit Exchange / MTF April 21 vs . July 16 . 4 . Big XYT – _ Liquidity Trends since July 2016 – _ Dark MTF April 21 vs . July 16 . 5 . Bloomberg , LIS % of Dark Market , Q1 2021 6 . FCA Occasional Paper 60 : Banning Dark Pools - https :// www . fca . org . uk / publication / occasional-papers / occasional-paper-60 . pdf 7 . Liquidnet Analysis – LIS Executions in Stoxx 600 names via Liquidnet , January to December 2020
For more information contact : Gareth Exton , Head of EQS Distribution EMEA , Global Execution and Quantitative Services , Liquidnet , gexton @ liquidnet . com
Stoxx 600 names during 2020 . The timing risk saved through block executions in Stoxx 600 names was also significant , saving 1.4 days ( 743 minutes ) of exposure in the market vs . trading at 10 % POV 7 .
With the benefits of dark block liquidity evident , and the need to trade via low participation rate strategies also clear , traders have increasingly asked Liquidnet to develop solutions that help them to reconcile these two positions : trading over longer periods of time and at lower participation rates , whilst smartly accessing dark block liquidity . Liquidnet Smart Blocks is a global proprietary solution that aims to achieve this by dynamically stepping in and out of the block market , at opportunistic price levels that the algo has determined are appropriate levels to trade , while trading along a VWAP or POV strategy as chosen by the trader .
The opportunistic price levels determined by the algo are calculated using pre-defined rules related to choices made when deciding the benchmark and the degree of movement required , for example 10 % of the stock volatility , on-side versus the stocks correlated basket . This negates the need to have a clear price-level in mind pre-trade or a clear view on price direction , something traders often are unclear on at the start of an order .
In the first example shown ( Image 1 ), depicted as a buy order for Just Eat Takeaway ( TKWY NA ), the benchmark was chosen as the correlated basket signal ( which is our proprietary signal from Parameta Solutions , designed to highlight when a stock has dislocated from its peers ) and the required offset was 15 % of the stock volatility , so in this instance 25bps of movement . As the stock price moves throughout the day , there are periods of time when the price is favourable compared to the threshold-adjusted correlated basket , activating the Smart Block signal and the search for block executions in dark venues for the order . As the stock rallies relative to the basket , the signal deactivates and the POV order continues as its pre-set rate of execution .
The second chart ( image 2 ) is a representation of a real VWAP order by a Liquidnet client using Smart Blocks , where the trader used a 10 % volatility offset vs . the interval VWAP . As the price became favourable , Liquidnet Smart Blocks became active and the algo achieved a block execution using a conditional order type in an external MTF , at favourable price levels , outperforming the interval VWAP by 21.5bps .
If the challenges outlined here seem familiar to you as a buy-side trader , dynamic POV or VWAP combined with the functionality of Liquidnet Smart Blocks could help you to realise the benefits of dark block liquidity , while trading at low participation rates via a longer time horizon strategy . Smart Blocks is in the process of being made available globally , so please speak to your Liquidnet representative to explore the functionality in more detail .
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