With four months of Tick Pilot’s 24-month duration completed, the pilot’s winners and losers are clear to see, according to a recent presentation made by the Securities Traders Association.
After analyzing trading data provided by 39 brokers and more than 70 buy-side clients, Philip Pearson, director, algorithmic trading at agency brokerage ITG and who gave the presentation, sees passive trading strategies taking the greatest hit from the pilot while venues with inverted pricing witness a boom in pilot-related liquidity.
Comparing a two-month period on both sides of the pilot’s October 2016 rollout, Pearson noted that volume-weighted average price slippage has grown by approximately two basis points.
- “That is about a 13% increase over the pre-pilot period, which is extreme since the control group saw an 11% decrease,” he said.
Other types of algorithms, such as arrival price algos, also have witnessed a four-basis-point increase in execution costs over the same period.
“We define an ‘arrival-price algo as any algo that uses the inside spread as a benchmark,” said Pearson. “It could be and IS algo, a liquidity-seeking algo, or an opportunistic algo. We group all of them together.”
Orders for stocks in the pilot’s three test groups saw their costs increase 113% when using arrival-price algos compared to a 35% increase for stocks in the pilot’s control group.
As a result, passive trading using IS algos is down about 22% across the board, he said. “With the increase in the NBBO, people have problems trading passively, and it is forcing people to cross wider spreads.”
Arrival-price algos also are taking significantly longer to execute, according to Pearson.
“The average duration of an algo order, the length it is kept open once it is sent to the broker, is up about 20%,” he said. “I believe the reason for this is that people are having more trouble completing orders, especially with arrival-price type algos. The VWAP-algo and dark-algo orders also are left open longer, which we found interesting.”
From a liquidity perspective, markets with invested pricing are reaping the rewards as their volumes in pilot-related stocks have sore 93% since the start of the pilot.
Pearson does not find the growth that surprising since market markets and broker algos have prioritized these venues as a way to cut the queue.
“Stock previously didn’t have much competition on the inside, where they do now,” he explained. “In a competitive atmosphere, the way that you will benefit is by trading on an inverted venue so that you can get your orders filled before the people on the standard exchanges.”
In the meantime, Pearson adamant that the pilot-related stock is where traders will prove their worth.
“Almost anyone can trade 10,000 shares of Microsoft,” he said. “However, some of these super illiquid names are where traders add value.”
