Agency broker ITG is adopting a new approach to dark pool trading with a new algorithm that will seek to find the best liquidity options across all pools rather than excluding ones that are widely considered “toxic”.
The POSIT Marketplace 3.0 dark optimisation algo will seek to maximise fill rates across 25 US dark pools, seeking out “good liquidity” in all those pools.
Its strategy is a marked change from many dark trading algorithms, which normally seek to exclude venues that have a large amount of toxic flow in order to minimise client exposure.
“Rather than simply shutting off access to bad pools, we believe there is at least some good liquidity in each pool and clients should be able to benefit from that,” explained Jeff Bacidore, head of algorithmic trading at ITG. “The algo will use a combination of different order types across all these pools to single out the best liquidity for a given order.”
The algo also features learning capabilities, which can calculate the best way to execute an order across different pools by learning about fill rates and market impact, enabling it to tune its execution strategy as an order progresses.
“The models of dark pools have begun to converge in recent years due to the proliferation of electronic access. It’s a rather heavy handed approach to just say a pool is toxic and has no good liquidity,” Bacidore said.
Additionally, it will make use of a proprietary system to determine minimum fill sizes.
Bacidore added, “Normally you will have pre-set minimum fills for large-cap and small-cap stocks, but this doesn’t properly reflect the liquidity and price of each individual name. A stock with a higher share price might see few fills if you set the threshold at 1,000 shares compared to a stock that trades at US$1.”
“Using an advanced statistical technique, we’ve examined fill data for each stock to determine appropriate minimum fill size for each name.”
POSIT Marketplace 3.0 is available through ITG’s Triton execution management system or via FIX connection from third-party trading systems. It is also integrated with POSIT Alert and ITG Prism, giving traders full visibility of their orders in real-time, enabling them to track their execution performance.
Currently the algo is only available in the US but a European rollout is planned to follow.