In move to slow down the manic pace of equity trading, PDQ Enterprises LLC announced a new electronic auction market that inserts a split second pause into the current high speed trading market structure.
The new auction model is the first of its kind, according to Keith Ross, CEO of PDQ Enterprises LLC, located in Glenview Ill., which runs its trading platform out of the Savvis data center in Weehawken, New Jersey.
The alternative trading system, known as PDQ ATS, has been up and running for the past two years with its so-called “first to respond” and “first to trade” functionality, but the electronic auction model has been under development for one year.
With the PDQ trading platform, an order is paused for a set period of time – 20 milliseconds — and in that time liquidity can be aggregated through an electronic crowd competing for orders, says Ross, who is a former options traders on the CBOE and also the former CEO of GETCO LLC, one of the globe’s largest high frequency trading firms. Ross says the process of pause levels the playing field for participants who are both the high frequency market makers and the big institutional investors. “We are not trying to exclude high frequency,” says Ross.
“We want to be open, available and fair to the whole marketplace,” says Ross, explaining that the model combines the benefits of the physical pit with the benefits of an electronic crowd.
About 65 firms are currently connected to PDQ’s ATS including market makers, high frequency trading firms, day trading firms and agency brokers on the liquidity-supplier side plus a few buy side firms, dubbed liquidity seekers.
“Institutions are annoyed with the high frequency trading guys, as they feel they are being gamed, while the HFT firms are concerned that institutions have better fundamental information in the short term,” he says. HFT shops that post first in the lit markets are subject to “adverse selection” by the institutions, he claims.
While PDQ’s electronic equity venue pauses the auction, it collects responses from the algorithmic liquidity responders and creates an order book based on price/time priority and then it executes the order against the book. The pause also enables PDQ to from a book with more size and better prices, contends Ross.
Institutions would submit “a request for trade” and within the 20 millisecond-timeframe, whoever is the first to respond to the order gets it, according to PDQ’s spokesman. This could take one millisecond or the full 20,” notes the spokesman.
To protect the confidentiality of big investor orders sitting on the book, PDQ requires the liquidity seekers to host their algorithms in PDQ’s facility at the Savvis data center in Weehawken, New Jersey. “We control their input and output and make sure that they are not messaging the content out of the PDQ facility, says Ross. “It’s highly secure,” insists Ross.
The firm also offers an order type for a buy side player to colocate with PDQ and manage an algorithm for them. “This way, their speed will be in step with the high frequency traders and they will have an order resting with PDQ,” says Ross, who calls this virtual colocation for a nominal fee.
PDQ’s technology was originally developed by Christopher Keith, a former chief technology officer and SVP of the New York Stock Exchange in the 1970s and 1980s, who founded ExchangeLab about 10 years ago to work on trade automation. Keith, who is now retired, invented and implemented the NYSE's electronic trading system (DOT). PDQ is a spinoff of ExchangeLab..