Weeden & Co, a full-service US institutional broker, has teamed with financial software provider Pragma Financial Systems to offer second-generation anti-gaming logic for dark pools.
The software, called OnePipe Lifeguard, will be available through OnePipe Optimal Liquidity Management System – the firms’ joint trading network, which currently connects to more than 30 dark liquidity sources.
The firms claim that OnePipe Lifeguard’s enhanced anti-gaming logic will be able to detect and deter a wider range of styles of price manipulation strategies without compromising OnePipe’s crossing rates.
“Our customers indicated that gaming in dark pools and passive liquidity sources was their number one concern,” said Douglas Rivelli, managing director at Weeden & Co, speaking to theTRADEnews.com. “They found liquidity in those pools but often at a very detrimental price. That was the impetus for us to step up our anti-gaming methodology.”
According to Peter Fraenkel, director of quantitative services at Pragma Financial Systems, Lifeguard continuously calculates a fair price that has been ratified by “steady trading” in the open market and represents the consensus of market participants. “If we see an adverse price that isn’t similar to this representative price, we will set a limit price that makes it impossible for the trade to occur,” he said.
There is also scope for clients to choose different levels of protection, ranging from limiting trades that show hints of possible gaming to only limiting trades that are definite cases of gaming.
Although dark pools offer benefits such as price improvement and reduced market impact, Fraenkel says these characteristics inevitably attract gaming. “The fact that you get a price without having to display one is one advantage of dark pools, but that’s also the Achilles’ heel, because it’s possible for you to push that price around with much less volume than is actually going to be crossed. Our heuristics look for sharp price moves in what would otherwise be a very thinly traded stock,” he said.
He also noted that gamers with the biggest propensity to self-justification would refer to gaming as market making or providing liquidity.
Rivelli asserted that staying one step ahead of the gamers would prove to be an ongoing process. “It’s a cat and mouse game. Gamers adjust their tactics based on what they believe the anti-gaming technology to be,” he said. “It’s our job to identify that, and we are in a constant process of improving our anti gaming capabilities.”