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Trading Via On-Demand Auctions is Better for Buy-Side
Traders Magazine Online News, February 6, 2019
When it comes to better executions and trading, blocks are better. And so are on-demand auctions.
Says who?
Don Ross, chief executive officer of PDQ Enterprises LLC, the parent company of CODA Markets, for one.
Ross has long argued that block trading via auction is one of the best ways to improve executions – getting larger size, while minimizing information leakage and adverse selection. He explained to Traders Magazine that CODA’s philosophy is straightforward: to produce better trades by taking the time dimension out of execution.
“Much of the inefficiency in trading today comes from the need to be a nanosecond faster than everyone else in order to avoid being ripped off,” Ross said. “But if you do price discovery and order-matching multilaterally, as we do, costs go down and returns go up. For everyone. Our systems are complex and state of the art, but our concept is simple.”
But it’s not just Ross singing the praises of on-demand auctions. Recently, Greenwich Associates conducted a study on auctions and stated they are a “time-tested, proven market model and are the workhorse for price discovery in the U.S. financial markets.”
The market consultancy quotes one buy-side trader as saying on-demand auctions (like CODA Block) are a unique liquidity source and as such have improved his executions. Furthermore, it was reported that only 1 in 10 buy-side traders currently have access to this kind of liquidity, and many more are not even familiar with them. However, Greenwich states that given auction’s proven ability to source liquidity will spur future adoption.
And more recently, ViableMkts, a strategic advisory firm that provides business analysis, research and guidance to institutions, supported and advocated the usage of on-demand auctions, especially those conducted at CODA Markets.
The firm conducted a study observing trading via CODA Block for the 12 months starting October 1, 2017 and ending September 30, 2018. Among the report’s findings:
¦ 97% of all executions took place at or better than the NBBO despite a share-weighted fill quantity of 441% of the NBBO order size.
CODA Block delivers strong hit rates and unique liquidity
¦ 10% of all initiated auctions resulted in a trade.
¦ 11% of all small-cap auctions resulted in trades.
¦ 12% of all mid-cap auctions resulted in trades.
¦ CODA Block auctions result in minimal leakage and impact
On average, CODA Block post-auction mark-outs moved:
¦ Only 7% of the Spread at 30 seconds (post auction)
¦ Only 12% of the Spread at 60 seconds (post auction)
¦ Average spread width for CODA Block trades was 11.5 bps. Data is consistent throughout the year.
“Initiating auctions on CODA Block could be a valuable tool for trading institutional size with little downside and potentially large benefits,” said David Weisberger, Head of Equities at ViableMkts, pointing to the data. “Auctions which result in trades are beneficial to the initiator, particularly when attempting to trade substantial quantities relative to the displayed market.”
Furthermore, Weisberger added the metrics for both market impact and information leakage with the auctions can be judged benign.
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