Now that dark pools are becoming one more variable in the electronic trader's life, it isn't a surprise that firms and vendors are doing their best to create algorithms that smoothly navigate these pools. In a way, this is nothing new. The preponderance of electronic communications networks (ECNs) for over-the-counter (OTC) equities spawned the need for smart-order-routing technology in the late 1990s.
Now, the proliferation of new alternative trading systems (ATSs) - many of which offer "dark," or undisplayed, liquidity - combined with the best-execution requirements of Regulation NMS, again requires technology capable of managing an order in multiple markets - simultaneously. To overcome this challenge, two broker/technology providers, Investment Technology Group (ITG) and EdgeTrade, have released new algorithmic products.
EdgeTrade introduced the FAN (Find and Nail) algorithm in mid-September. FAN accesses both public markets, such as Archipelago and Inet, and private markets, such as NYFIX Millennium, LeveL and Pipeline, according to EdgeTrade President Kyle Zasky. The algorithm posts and hits bids in small increments at each venue simultaneously rather than serially. "In the past, [smart-order-routing technology] was a linear function that went to one destination after the next," Zasky says. "If the first one did not have liquidity, it would go on to the second and third," he adds. "In a very fragmented market, that is not an ideal solution."
Instead, FAN executes orders at venues that respond the fastest at the desired price level and also explores liquidity held in reserve at these venues at the next-best price level, Zasky explains. The algorithm immediately cancels the orders in the non-responsive or less-than-desirable volume venues and filters orders to more-responsive locations, he continues, noting that clients can control the destinations FAN will explore.
ITG has combined its Dark and Active servers to create "Dark Inside." With the new offering, a trader using the Active server, which places orders on a wide range of public ATSs and executes them based on arrival price, now can place a portion of the order into dark books in search of hidden liquidity in the same stocks, according to Tony Huck, head of electronic trading at ITG.