ALGO UPDATE: Finding Liquidity in the Wake of Block Trades
Maybe a trader missed the opportunity to get in on a block trade at particular venue. Perhaps it was seller size. Could’ve been adverse selection kicked in as your order finally got to the top of the queue. Thanks to Liquidnet, traders now might be able to still get their block trade on with the help of a new algorithm called Surge Capture.
Built to take advantage of the increased volume and volatility that occurs in the market immediately following a block trade, Surge Capture soaks up additional liquidity by seamlessly placing a specially designed order in the market for any unfilled shares immediately after an initial block executes, explained Rob Laible, Liquidnet’s Global Head of Equity Strategy. He told Traders Magazine that often a completed block trade leaves in its wake other unfilled block orders – and this is where the algo kicks in.
“Block trades trigger a ripple effect in the equity markets, with the initial block often being a catalyst for a cluster of more block executions, particularly in the first few minutes afterward,” Laible said. “Surge Capture allows our clients to automatically take immediate advantage of this phenomenon, putting them in position to benefit from positive price swings rather than trying to react to them. Finding that unique block in Liquidnet and opportunistically capturing additional liquidity without impact is truly a win-win for our clients.”
What’s Surge Capture?
Surge Capture, in its simplest form, is a new algorithm soaks up the additional liquidity left in the wake of a block trade from orders that didn’t initially get filled. This new algo is the first trading solution to launch out of Liquidnet’s new innovation hub, Liquidnet Labs. It is here in the firm’s skunkworks that new tools are created tested – not just by Liquidnet but by traders too – and sent to market. Changes can be made virtually real-time and sent right out for actual usage.
“We’ve done white papers on volume before and after a block trade, and we’ve seen there is volatility after the block trade as other algos have volatility or volume-based components that want to get filled,” Laible said, “or they need to cross a spread. We’ve found that blocks do tend to cluster around one another which can trigger another block trade.”
So, Surge Capture works based on assumption a block trade has already happened, but looks to get block trade done off excess block volume.
“Surge Capture is an algo but think of it as a linkage to the block trade,” Laible explained. “This is the first of other components and services that are part of the Virtual High Touch suite.”
Virtual High Touch is billed as a completely new category of buy-side trader technology that combines advanced data analytics, liquidity search tools, new algorithms, MiFID II solutions, and real-time market intelligence and decision support. Virtual High Touch, Liable added, provides traders with unique decision support and liquidity enhancing tools—both now and in the future—to help determine the best trading and liquidity strategies, monitor market conditions throughout the life of each order, and access an audit trail for best-execution decisions.
“We’ve taken the traditional high-touch trader model – selecting an algo, providing market color and or trade insight – and gone a step further,” Laible said.
Laible told Traders Magazine that pilot testing of Surge Capture began in late 2016, with users encountering positive results. Such as:
- On average, a Surge Capture order adds an additional 19% of volume to the original block execution
- On average, a Surge Capture order will absorb 9 out of every 10 blocks that appear in the minute following the initial block
- Year to date, 61% of Surge Capture volume has been executed in blocks, with an average Surge Capture block print of 32,500 shares
- 95% of Surge Capture orders are filled at or better than the mid
- 96% of Surge Capture orders get filled in the dark
But don’t think for a minute that this is purely a dark algo strategy. It isn’t, Laible said. The algorithm will go to the public exchanges as they employ dark order types to source block trades. Surge Capture will continue to rest conditionally in Liquidnet’s own pool but will outbound and go out and rest in other venues to look for post-block trade liquidity.
Surge Capture is currently available for US and Canadian equities.
But there’s more. Laible confirmed to Traders that Surge Capture version 2.0 is already in the skunkworks and getting ready for testing and distribution.
“Though Liquidnet Labs, we get feedback for further ideas for enhancement and drop them right into the algo for actual testing. Then we move the new version right out,” Laible said.
FX traders needs more transparency and tools to deal with venue fragmentation.
Algos can now be tested for MiFID II compliance.
MiFID II regulations will bring new best execution requirements.
However, the fund declines to provide it.
Algorithm leverages machine learning to find inter-listed liquidity.