Investment bank Morgan Stanley has widened the use of its Trajectory Cross dark pool to help clients reduce point-in-time and gaming risk for equity trades.
Trajectory Cross, which is available in the US, Europe, Japan and Hong Kong, matches orders from clients using an interval VWAP benchmark. Therefore, orders are crossed at the VWAP price over a certain period of time, which is specific to each stock depending on its liquidity and volatility profile.
According to Kevin Twitchen, executive director, institutional equities, Morgan Stanley, Trajectory Cross offers advantages over other broker crossing networks and dark multilateral trading facilities (MTFs) because it favours natural, schedule-based liquidity.
“All non-displayed liquidity pools that match orders within the prevailing spread do not prevent potential adverse selection, i.e. even though the spread is rational and liquidity is of a sufficient depth at the time of execution, the stock can experience short-term price movement after the fill,” Twitchen told theTRADEnews.com. “Time of day, changes to liquidity before scheduled auctions and news events are just some of the factors that can affect the performance of a stock after a fill is received.”
MTF-operated dark pools such as Chi-X Europe's Chi-Delta, NYSE Euronext's SmartPool and BATS Europe's dark pool match orders at the mid-point of the spread, while most broker crossing networks, including Morgan Stanley's MS Pool, can match orders on a discretionary basis at any point within the spread.
The interval VWAP period chosen for each stock in Trajectory Cross is primarily determined by price volatility, i.e. how often the mid-point price shifts in a certain period of time or how often the bid and offer price systematically moves up or down.
“These volatility factors are particularly important in Asia, where markets are characterised by wide spreads,” said Twitchen. “The same is true for small- and mid-caps stocks in the US and Europe.”
Trajectory Cross has been available as part of Morgan Stanley's Benchmark Execution Strategies (BXS) algorithmic suite since 1999, making it one of the first broker-operated dark pools at the time.
However, as buy-side participants became more concerned with gaming and avoiding toxic flow, Morgan Stanley decided to enhance the use of the pool so that it could be deployed as part of an overall trading strategy, rather than being embedded in BXS.
“The type of flow found in Trajectory Cross is longer term and institutional in nature, excluding short-term predatory strategies, which is potentially not the case in other types of dark pool that seek immediate execution within the spread and have a wider variety of liquidity participants,” said Twitchen.
Morgan Stanley plans to introduce additional functionality to Trajectory Cross in the US and Europe within the coming months.