Agency broker Convergex is helping traders execute their options orders in the darker recesses of the equities markets.

The firm has introduced Darkest for options, a new single-leg trading algorithm that was designed to offer both buy and sell-side clients with enhanced flexibility and functionality. According to Ben Londergan, executive managing director of options trading and technology at Convergex and Joe Corona, managing director, strategic planning, both of whom spoke with Markets Media, Darkest is a low impact, cost effective liquidity seeking algorithm.

Both explained that the Darkest options trading algorithm can operate passively, systematically probing the market for hidden liquidity while remaining concealed; or it can operate aggressively, taking liquidity if it becomes available.

“There are two basic subsets of options order flow to which Darkest would apply,” Lonergan explained. “First, Darkest targets clients who want to make a trade but are willing to sacrifice immediate execution in order to decrease costs – like a hedger or trader who is putting on a position over a couple of days.”
Secondly, he added that Darkest is meant to be used by traders who want to be quieter about their intentions, those who tend to not post every order at once.

“This algo evolved from both clients who wanted something to help locate liquidity but not necessarily at the cost of taking liquidity from say a maker-taker venue, for example” Corona said. “These users want to manage fees while finding liquidity. Also, trends within the options marketplace, such as liquidity capture in ETF names was becoming more difficult. In the end, our client base wanted to know how to find liquidity, minimize their footprint and maximize efficiency.”

How does it work?

The algorithm uses a spray order mechanism and sends the order or orders to venues simultaneously to find liquidity. If it fails to locate the desired liquidity and in the desired time frame, the algo will then again after a time repeat the spray process periodically depending on how the user sets his level of aggression or in the case or Darkest, passivity.

“When this type of order/algo is launched it will probe a defined set of exchanges that support dark liquidity mechanisms, such as flash auctions,” Corona explained. “If there’s insufficient liquidity to be found, then darkest will look at Convergex’s NXP ATS.”

The algo’s aggression is configurable, Corona added. “We set the default configuration but discuss it with the client and they can have it customized to their own particular needs. We just set the base parameters.”

This algo will wait to execute the biggest block it can – it’s not in a rush as some algos are programmed to be. And it will only search for liquidity as it will only take from a user specified list of exchanges.

“Execution also depends on market conditions,” Corona continued. “If an order can be filled on a pro rata exchange, then so be it.”

Other key features of Darkest include:

• Low market impact – invisible to the marketplace;
• User-specified time intervals discreetly probe exchanges (and NXP) for liquidity;
• Available in Convergex’s BLAZE GUI or over API; and
• Highly customizable to meet client objectives.

And it is the last point that Lonergan explained was crucial – Convergex worked hand-hand with clients to customize Darkest specifically for each user.

Darkest Options algo follows the firm’s eponymous algo for equities, which served in part as the base model for development. This served to shorten its development time to roughly six weeks once Convergex decided to commit to developing the algo for options.

“At this point Darkest supports single-leg options orders,” Corona said. “But a multi-leg version will be coming in the future.”

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