PDQ stands for Procedure Derived Quotations. PDQ is a response mechanism that allows algorithmic procedures to provide liquidity to customer orders. It will also be employed for active algorithmic order management.
In 2000 it was estimated that 40 - 45% of all trades were algorithmically driven and priced. In 2008, the estimate is surpassing 70%. As algorithmic trading secures a larger and larger percentage of the market the need for algorithms to be able to respond to order flow is compelling. The products of PDQ will allow liquidity providers, i.e. specialists, market makers and dealers to respond to order flow with their algorithmic models and provide significant additional liquidity to the markets.
By creating the capability for algorithmic traders to respond to order flow PDQ will create many benefits for the marketplace and its participants. Among them are: greater efficiency; increased liquidity; anonymous large block trades; reduced risk in handling large trades; confidentiality for all participants; complex quoting; off loading of messages and traffic from exchanges; rebuilding of the specialist function; and altering the ECN cost structure.
Specific market participants will recognize the following enhancements with PDQ:
Institutions: Improved liquidity, enhanced block trading, interaction with the “real” market, mobilization of latent volumes.
Liquidity Providers: Algorithmic response to liquidity requests, more efficient quoting, less risk for each trade and less systemic risk.
Exchanges: More volume, deeper liquidity, new revenue, less quote traffic.
While using PDQ, algorithmic traders will effectively act “locally” by being able to respond to requests for trade thereby creating an electronic crowd. This will convert the current stochastic electronic market back into a dynamic and interactive marketplace. By recreating the crowd electronically PDQ will move the markets toward consolidation. Also PDQ plans to alter the ECN cost structure by recognizing the reduced risk that Liquidity providers have with PDQ.
PDQ represents the next generation of electronic trading.