TabbFORUM: Fragmentation vs. Liquidity: Can Technology Resolve the Debate?

Today’s traders are focused on technology and connectivity, and buy-side traders increasingly are leveraging tools and techniques for developing and selecting algorithms. While these algos have helped traders lower their transaction costs, however, breaking up large trades into smaller pieces and executing them over time leaves the trader open to both market impact of a poorly timed, executed, or selected algorithm, as well as the opportunity cost of not executing immediately and leaving the trade open to a potentially market-moving event. This cuts to the heart of the age-old debate: Can an order both limit market impact and opportunity cost? TABB Group founder and research chairman Larry Tabb examines the new technologies and services that are helping limit impact and opportunity cost as they enable clients to leverage algorithms, gather liquidity, and keep orders in the market.

There also are a few new trading venues that help traders aggregate liquidity. The most novel platform currently in production is Imperative Execution’s IntelligentCross. IntelligentCross is a dark pool that analyzes the market impact of information dissemination and adjusts the matching period to minimize the amount of market impact. The theory behind IntelligentCross is that there are a number of market participants that closely track market data and quickly react to small market changes, and matching period randomization can shift the trading signal to a period outside of where these traders operate. By lengthening and randomizing the execution period of the pool, faster firms will leave, and longer-term trading strategies that are not as focused on microsecond- and millisecond-based returns will remain. This not only limits the impact of high-speed trading and reduces the shorter-term market volatility high-speed traders can create, it also enables traders to execute against a more stable quote that doesn’t significantly change after execution.

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