Convergex is aiming to help traders get ahead of the U.S. Securities and Exchange Commission’s upcoming tick-size pilot program by tweaking its small-cap algorithm.

The agency-focused global brokerage and trading-services provider has modified the algorithm’s logic — improving its fair price model to enable traders to source as much liquidity as possible in less liquid names, while minimizing market impact. As Oliver Sung, Convergex’s head of electronic execution for the firm’s execution solutions group explained, in a tick pilot world where the tick size is moving to a nickel from a penny, the need to avoid adverse price selection only increases.

“With the tick pilot almost upon us, legacy algos will, when they execute in size, may start to push prices around,” Sung said. “In greater increments. Things will move around in five-cent increments, not just in pennies anymore.”

Convergex’s small-cap algorithm rests hidden in more than 15 alternative trading systems, and exits the market when it senses that it is signaling its presence in the market place via price movements in the underlying symbol. The algorithm will then return to the market when it determines that it is advisable to re-engage. Meanwhile, block executions are continuously analyzed for the potential execution of conditional orders.

“We want our clients to be able to find more liquidity in all small caps, not just the one’s included in the tick pilot,” he said. “But for stocks in the tick pilot, the algo becomes more useful in managing price movements.”

That was a point echoed by Themis Trading in a research note sent out Thursday. In it, Themis cautioned that some algorithms will need to adjust their strategies to comply with the trade-at test group.

“For Test Group Three, they (algos and their brokers) will need to send orders to all protected quote venues (with the new trade-at ISO order type) for the visible size that is displayed on each venue,” Themis wrote, which it thinks is a good thing and will encourage more displayed liquidity. “Most brokers are working diligently on complying but again we recommend checking with your algorithmic providers to make sure they will be adjusting their algos appropriately.”

The Tick Pilot will begin on October 3 with all pilot stocks running by October 31 and run for two years. There will be four groups in the pilot program: a control group, a first test group, a second test group, and a third “Trade At” group. For more details see this article here.

Finra announced on Tuesday the list of securities that will be included in the pilot. There will be approximately 1,600 securities in the program (400 for each group). The pilot includes only stocks that have a market cap of less than $3 billion, trade average daily volume of less than 1 million shares and are priced above $2.

Sung explained that the additional changes have been made to the algo’s fair price model logic, such as changes to how aggressive it will execute orders. The algo now actively looks to see if it will affect prices and by how much if it opts to execute at a desired level. If the execution is deemed to change prices too much, the algorithm will not execute the order. Rather, it will wait for a more opportune time.

The algo also saw some tweaks to the “Shot Clock” feature that strategically takes liquidity from lit and dark markets in an intelligent and impact minimizing manner. This feature allows a buy-side trader to select a default amount of time (the clock) that the algorithm has to execute, or shoot, the orders out to be filled. Once the shot clock time expires, resting orders are automatically pulled and the trader can re-select the parameters of the shot clock and try again.

The shot clock is meant to opportunistically take liquidity from lit and dark markets in an intelligent and impact minimizing manner. “In essence, the shot clock feature allows traders to have full control to replicate the manual workflow they are currently using to trade small cap stocks,” Sung said. “Traders get full control and this algo replaces the manual workflow most traders are using to execute small-cap trades.”

Buy-side traders can also set the pace in which the algorithm executes an order from three levels of aggression. Traders can set aggression levels according to their knowledge of the stock – not what Convergex or a computer model might suggest. But in the case of the Tick Pilot, the algo’s logic is always running to see whether or not it is advisable to trade and can let the trader know.

Furthermore, the Small Cap Algorithm supports min-dark fills and can customize venues on a client-by-client preference.

The small cap algo still works by placing resting hidden ‘child’ orders in over the dark pools. If an order cannot be executed in a dark venue, then the algo routes away to a public exchange.

“The algorithm will then return to the market with orders when it determines that it is advisable to re‐engage,” Sung said. “Also, block executions are continuously analyzed for the potential execution of conditional orders.”

No resting orders are placed on exchanges.

More on Algorithms:

• Finra to Release Tick Pilot Stocks Next Week
• ITG Algo Aims at LatAm Market Close
• ITG Launches Brazil and Mexico Close Algorithms