Looking for that elusive block trade but want to go through a bulge bracket broker?
Then J.P. Morgan might have something for the buyside – a new algorithm designed to seek out blocks of stock and get a large order done. The new algo, dubbed “Aqua Blocks,” incorporates a new level of urgency that tracks down sizable liquidity at multiple venues simultaneously through conditional order types.
The search for blocks has become more difficult than ever due to the growth of e-trading in recent years, but appears to have stalled for the moment, has resulted in lower average execution size in the market because the algos being used are splitting orders into small slices.
According to J.P. Morgan, Aqua Blocks was developed in direct response to client demand to trade electronically, but also to get larger execution sizes. According to the firm, dependent on how one defines blocks, which usually are blocks of stock larger than 100,000 shares, they represent 10-20% of all market volume.
Noel Reyes, head of product for equities execution services at J.P. Morgan., told Traders Aqua Blocks incorporates a new level of urgency that tracks down sizable liquidity at multiple venues simultaneously through conditional order types.
Blocks is a new urgency level in Aqua, J.P. Morgans flagship liquidity-seeking algorithm, Reyes said. The urgency level is selected by the trader upon order entry. With respect to our routing logic, it is continually being enhanced based on analysis of historical and real-time data. In addition, our liquidity access improved over time as we added new block venues. We felt it was the right time to offer clients what we believe is a very unique product in Aqua Blocks.
So how does Aqua work?
Unlike most generic algorithms, Aqua Blocks purposefully does not split orders into small slices. It uses the quant models to look for larger executions in specific trading venues such as JPM-X, IEX and other known block trading facilities.
The strategy employs proprietary logic to determine the minimum fill size for each order based on stock characteristics, Reyes said. On a per order basis, however, this logic will be overridden if the client chooses to input their own minimum fill size. Currently the strategy will simultaneously route to each venue. The order will remain open until the end of the trading session or until the trader cancels, whichever happens first.
Unless otherwise directed by the client, public venues are only accessed to clean up an odd lot residual.
The idea for Aqua Blocks was born in early 2015. It went live for the first set of clients in July after months of development work and internal beta testing.
This version of Aqua was launched in 2011 as part of the firms overhaul of its algorithmic trading product, Reyes added.
So how important is the block business to JP Morgan? And is trading blocks the best way to help the buyside achieve best execution and generate alpha?
We believe that block trading is part of an effective approach to achieve improved execution performance, Reyes said. That being said, it is not viable to execute all orders exclusively via blocks. Where liquidity is available, Aqua Blocks is designed to seize the opportunity to trade in large sizes, but we expect clients to utilize the other urgency levels that also target non-block liquidity.
