Alternative trading system PDQ has unveiled Auction1, an electronic equity auction designed for larger orders with heightened sensitivity to market impact.
PDQ currently runs a 20-millisecond auction using price-time priority, but Keith Ross, CEO of PDQ Enterprises, the parent company of PDQ ATS, tells Buy-Side Technology that with Auction1, the company is trying to grow its buy-side presence.
Earlier this year, PDQ brought on an institutional team to examine problem areas for buy-side firms, as PDQ has historically focused more on the sell side. What they found is that many buy-side traders want larger-sized orders with more liquidity than can be easily generated in 20 milliseconds.
As a result, Auction1 can last up to one second ─ hence the numeral in the name ─ and in that time PDQ will be able to aggregate three types of liquidity: conditional orders from various dark pools, natural orders already residing at PDQ, and market makers at PDQ responding to the 20-millisecond auction, Ross says.
“What we are doing with Auction1 is connecting the conditional order types at the different dark pools, and aggregating those so that if you have 10,000 shares of IBM to sell and we can find 5,000 from two different venues, we can pull those orders into the auction and aggregate the liquidity for the trader,” he says. “It’s a solution to a problem that everyone talks about, in terms of fragmentation of the marketplace. Obviously when we get started we’re not going to have all of the liquidity of all of the marketplaces at our finger tips, but we think that as people use it and see good results, we’ll grow.”
Auction1 will require a minimum size of 2,500 shares to initiate a trade, and a 500-share minimum to participate. Because the auction is run at random inside that 1-second time frame, it will also diminish the possibility of gaming, Ross says.
Ross believes Auction1 will offer three distinct benefits to buy-side traders, including price competition to fill orders through the auction process, aggregation of liquidity, and minimal market impact. “But we’ll have to back that up with numbers as the product develops,” he acknowledges.
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