Pipeline Trading Systems, an agency broker and operator of the Pipeline block trading system for US equities, has launched an execution management strategy for small-cap stocks, which combines block trading, algorithms and access to dark liquidity aggregators.
According to Pipeline, the system is designed for opportunistic trading. It is able to trade quickly where appropriate but will not interfere with price formation or trade at the ‘wrong’ price. Pipeline claims the system offers substantially better shortfalls than algorithms.
“Pipeline’s small-cap strategy is different from algorithmic solutions. These algos are either not opportunistic, or they rely on a ‘fair price’ model to choose opportunities and therefore can backfire badly when the fair price model is wrong – most spectacularly in the fall of 2008,” said Henri Waelbroeck, Pipeline’s director of research, in a statement. “The basic idea is to rely on a fair price model when appropriate, but know when to pull back and let the market find the fair price.”
The small-cap system accesses non-displayed liquidity through several dark aggregators and uses agents to take opportunities on the displayed markets. It incorporates block fills where appropriate, and can use Pipeline’s network of buy-side order management systems to identify latent liquidity. The system can be configured to the specifications of individual buy-side traders.
“For small cap names, liquidity tends to be clustered in time. If small fills add up to a high participation rate, our small cap system will avoid posting limit orders and will carefully control the participation rate, both in the small-order markets and in block markets,” said
Waelbroeck. “This type of trading can be accomplished without interfering with price formation, so the stock is free to move favourably.”