Many people are talking about potential changes to US equity market structure, but few are suggesting what this means for the next generation of software development and trading tools.
Today, Clearpool Group announced the launch of Iris, trading technology to help equity market participants change the way their orders are handled electronically, to improve their interactions with liquidity and fill rates.
“At a high level, the technological undertaking is designed to provide a solution for market participants that are really evaluating the market structure as it is and in terms of how it’s going to change,” Joseph Wald, CEO of Clearpool Group, told us. Clearpool Execution Services, an agency-only broker-dealer, will use Iris technology to execute orders on behalf of clients. The technology is live for about a month and is ready to be released for clients, says Wald.
Even as the market structure evolves, speed and fragmentation of liquidity across multiple exchanges and different dark pools will continue, says Wald.
Just as high-frequency trading firms using sophisticated technology to ensure their orders are first in each venue’s queue, Clearpool has designed Iris to elevate each order’s prioritization in a venue’s execution queue. “What the street has been clamoring for is a solution that responds to the market structure the way it is and will grow with changes,” says Wald.
Founded in 2012, Clearpool has close to 40 employees and is “packed with people have serious expertise in the electronic trading space.” Clearpool Group includes two businesses: Clearpool Execution Services, an independent agency broker dealer, and Clearpool Technologies, developer of electronic trading, routing, and risk solutions.
“What Iris allows is for people to gain an advantage from any venue. It prioritizes the way their order is being handled, and it’s giving them a better chance of getting executed,” says Wald who was appointed CEO in May of 2014. He joined from Gain Capital where he was executive vice president and ran GTX, the firm’s institutional FX trading business. Before that, Wald was managing director and head of Knight Direct, Knight Capital Group's institutional electronic trade execution business. Wald joined Knight after he sold his company Edge Trade Inc., a pioneer developer of agency-only liquidity seeking algorithms to Knight Capital.
One of Clearpool’s investors is Tom Joyce, former chairman and CEO of Knight Capital Group. Last year, Joyce joined Clearpool’s advisory board.
“I’m excited to be back on the entrepreneurial front,” says Wald, adding that “the marketplace has gotten quite stale and commoditized and basically status quo.
"There are been some solutions that have come out, and that people have gravitated to, but they have been narrowly focused on speed and high-frequency trading." Wald says Clearpool is focusing on a much more holistic offering to benefit clients.“This is how you can access the markets better, versus this is how you can access our market better.”
Wald says the solution is based on “strength in numbers” in that Iris is designed to aggregate order flow and also understands each venue’s order types, market structure, and execution protocols.
However clients will not use Iris directly. Clients that trade through Clearpool Execution Services will have Iris guide their order placement and improve their handling in both price/time and price/size venues, with cancel/replace orders and in sourcing block liquidity in dark venues.
Managing the queue position
To illustrate how Iris works in practice, Wald described a few examples. In price-time venues, mainly exchanges, orders that are first in line receive the executions. Iris is able to “decouple orders received from clients, combine them together into larger orders so that it’s managing aggregate orders on behalf of clients.” Say it had client No. 1, in line to receive an execution on venue A, and client Nos. 2, 3, and 4 with similar orders. “If client 1 cancels that order, rather than lose that spot in the queue, we’re able to move client No. 2 into client No. 1’s position.”
With the proliferation of HFT firms, whose trades are based on many orders in rapid succession, a lot of what they are trying to do is manage queue position, he says. “This technology really levels the playing field in terms of giving that benefit to an actual end client who is an agency broker, while managing the queue position in that style.”
Another scenario occurs when cancel/replace orders are used in algorithms as they try to find liquidity. If a client increases the order size, usually the order goes to the end of the line, according to Wald. Through Iris, Clearpool is breaking up that order, so that the increased size takes on a new position, but the original quantity keeps its place in line. For example, if someone buys 500 shares of XYZ stock, and they realize they want to buy 800 shares, typically the full 800 goes back to the end of the line. With Iris, only the additional order takes on a new queue position, while the original piece stays where it is.
At price-size venues, where the larger order often gets the execution first, Wald says:
We’re able to aggregate all of our cleint’s orders in one larger order, giving us the opportunity to interact with liquidity. If it has five orders going to a price-size venue, all totaling 20,000 shares, this has price-size priority over five separate orders of 4,000 shares each. Iris is able to source block liquidity in ATSs when there are minimum quantity or minimum size order types. Iris is able to aggregate all of our orders in those dark venues to give us a larger size order and that is able to interact with any of those orders that have a minimum size requirements. You’re talking about quality fills but access to liquidity you wouldn’t have had if you weren’t using Iris.
In addition, Iris works with conditional order types that are used by algorithms to source liquidity in dark pools. Conditional orders are used to notify clients when a contra side is there that meets their conditions.
Wald says there are versions of this technology used by high-frequency market makers for their own accounts, and there are certain algorithms that choose which venue to go to. But this is fundamentally different, he contends.
The technology is “incredibly complex” and is something that Clearpool is working on patenting, he says.“There’s a lot of work on the backend to deliver a technology that is seamless.”
In terms of client access, there is nothing that firms need to do other than connect to Clearpool Execution Services via FIX protocol. The target clients are predominantly institutions, but the sell side, other than the bulge bracket, would be interested in the technology.
“What’s nice is this is designed to execute real orders. This is designed for people who have orders that have to get done, that are mostly trading for a longer-term benefit,” Wald tells us. "This is not designed for some short-term strategy."Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio