Instinet Incorporated announced the launch of MAKE, a new algorithm that provides institutional traders with the same sophisticated liquidity providing tactics used by market makers.
MAKE is a tool that enables the buy side to act as a liquidity provider while still providing the controls and limits necessary for institutional trading. It is also the latest addition to the global agency broker’s Execution Experts’ algorithmic trading suite.
“What we’re offering is one-sided market making for the institutional trader that has suitable orders,” said John Comerford, head of global trading research at Instinet in an interview. “They may want to provide liquidity to save the spread, but there can be implicit costs in doing that — specifically adverse and negative selection — and MAKE helps mitigate, those,” he said.
“The benefit of providing liquidity is primarily saving the spread, but the trick is doing it while minimizing adverse and negative selection yet not leaking too much information in the process.”
Adverse selection occurs when a trade is poorly timed — a stock is bought on its way down or sold on its way up. “You’re catching a falling knife, so to speak,” illustrated Comerford. Negative selection occurs when a potentially advantageous trade is missed because the algo is being overly cautious.
Drawing on historical information, recent trading patterns and real-time market data, MAKE sizes and distributes child orders at multiple price levels and across destinations. At the same time, it controls for adverse and negative selection while reducing exposure to signaling, gaming and predatory techniques. Using a customizable control set, MAKE allows users to specify range of different styles of liquidity providing from “patient” to “urgent.”
“Similar to the various audio level controls on a stereo system, MAKE allows users to tune their settings depending on how patient or urgent you want to be,” said Comerford.
Comerford said that MAKE was developed in response to demands from customers seeking to trade in lower volatility environments, when the spread savings becomes even more important. “Clients who want systematically to be on the liquidity providing side need to use an algo because the techniques for providing liquidity making cannot be accomplished manually,” he said.
MAKE is particularly suited for low information trades where the opportunity cost is less important than impact reduction — particularly at low or moderate urgency levels — or large orders, where limiting information leakage and potential signaling is paramount. At higher urgency levels, it can be used for trades with higher opportunity costs, trading later volumes while remaining passively priced.
At lower urgency levels, Instinet’s signal-driven FADE logic — an acronym for Factors in Sizing Delayed Execution — can briefly pause or slow trading to reduce adverse selection, according to the release. With active cancelling logic, FADE is looking at market events that are telling it to back away.
MAKE is not only a standalone algo, but is also leveraged as the market-making component in all of Instinet’s algos. It has been out in the United States in test and in beta form as an underlying component for nine months. Next week, MAKE will be available in all 37 markets around the Americas, EMEA and Asia-Pacific in which Instinet agency brokers support algorithmic trading.
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