September 26, 2006

To attack the problem of finding hidden liquidity in a fragmented stock market, sell-side firms increasingly are devising aggressive algorithms with combative-sounding names reminiscent of jungle warfare.

In early August, for example, Citigroup released Dagger, a highly aggressive strategy that requires a limit order to capture a high percentage of ECN and exchange liquidity, according to the firm. "The measure of [Dagger's] success is how much of the available liquidity within that limit price a trader actually captures as a user," says Timothy Reilly, managing director, U.S. electronic execution sales, Citigroup Global Markets.

Also in August, Citigroup released Scout, an algorithm that will poll the major alternative trading systems (ATSs), search the hidden liquidity within the ECNs and, finally, trade on the major exchanges as an additional pool of liquidity if appropriate, adds Reilly. "What the [Scout] algorithm will do is route more flow to whatever outlet is providing more liquidity," he explains.