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