Trading at the close is going to get easier.
That’s the goal of agency-only broker Instinet’s newest crossing session or dark liquidity pool in its VWAP Cross, which is designed to help the buyside capture block liquidity in the last 60 minutes of the trading day or “at the close.”
According to Instinet, clients wanted the ability to anonymously trade blocks without market impact at the end of the day – enter the Last Hour VWAP Cross. This new match provides Instinet clients with execution prices at the consolidated interval VWAP from 3:00-4:00 pm EST (including closing auction) and builds on the success of the firm’s full day VWAP Cross. The final order is executed at 4:10 pm when all trading has concluded.
The liquidity pool helps both buyside and sellside traders manage their workflow and trade more effectively during the heaviest volume period of the day – and hopefully get large blocks executed, said Mark Govoni, Instinet’s head of sales and trading. He added the pool is ideally suited to traders hoping to lock in their benchmark without the possibility of market impact.
Here’s how it works. Using the Last Hour VWAP Cross, client orders are matched at 3:00 pm ET, with fills receiving an “indicative fill” at the current NBBO directly thereafter. After the market’s close, indicative fills are re-priced to the consolidated VWAP for the last hour of the trading day including the close -which accounts for roughly 30 percent of the market’s volume-at approximately 4:10 pm ET.
Govoni said that while algorithms and order slicing strategies can be an effective way for traders to achieve their benchmarks, they still incur some market impact cost. Thanks to its zero-market impact model-which also eliminates gaming risk and minimizes opportunity cost-VWAP Cross is increasingly being leveraging by clients for their benchmark trades.
Sean Conk, head of Instinet’s crossing desk, added that by virtue of its model, the VWAP Cross is not high-frequency friendly, thus eliminating potential trading partner that many believe erodes the ability to execute a block trade. “The VWAP Cross is really conducive only to natural liquidity – HFT firm’s generally find it to be a poor fit for their automated market making strategies,” he said.
But why start the cross at 3pm EST as opposed to 3:30pm EST, which is when many closing algos begin executing?
Kevin Woods, who is in Instinet’s institutional sales group, explained that after consulting with a wide range of clients – from hedge funds to long-onlys – Instinet found that running the cross at 3:00 would work best for most clients’ workflows and that setting the cross at 3:30 pm could be “cutting it too close” for some clients to get their order runs completed.
According to Instinet data for May, VWAP Cross’ average daily volume was 8,060,776 shares (double counted) and its average trade size per transaction was 3,205 shares. Instinet trailed only Liquidnet by that measure, according to Rosenblatt Securities.
VWAP Cross can be accessed via Instinet’s own Newport execution management system, through other third-party trading systems or via direct FIX connection.
