PDQ

Current electronic markets suffer from the limitation of the LPs ability to respond only to the current stochastic markets appearing in the electronic book. This creates an environment where dealers, who typically must post their bids and offers first to create the market, suffer from being the first to declare. This is the reason that the LPs are compensated with a rebate in the ECN exchange models. The rebate is sufficient compensation for the LPs to post their markets first and be able to deal successfully. Unfortunately, this process has created a market of many small lots posted in the book which are rapidly canceled and replaced by high speed algorithms. If an algorithmic market for security A is based on the quote for hedging in security B, the market in security A will always be a fraction of the hedge quote of security B because of the risk inherent in executing the hedge in security B (time of execution, change in market quote, systemic event, etc.) But if the size of A is known and the size of B is known at the moment of execution, the LP can make a more substantial market in security A while hedging simultaneously in security B. PDQ will facilitate this process.

Thus the PDQ process will allow a LP to respond to incoming orders with a dynamic market allowing for greater size and depth based on instantaneous current market conditions. Additionally, these responses to orders by the LPs will only be available to the contra side for a few moments in the marketplace. Consequently the risk profile of trading significant size blocks is greatly reduced because of the brevity of the possible transaction and the ability to respond under specified circumstances.

Most current block trading venues rely on either external prices or negotiation techniques to establish the price for block trades. These methods are either not controlled by the parties or are subject to leaks and delay during the negotiation process. The PDQ method allows for a private pricing procedure and complete anonymity by all parties. The participants of PDQ will also be scanned for indications of interest on a periodic basis allowing for the pairing of trades between liquidity providers.

When PDQ facilitates market efficiency by fostering algorithmic crowd liquidity, volumes should increase and as the benefits of PDQ become obvious to market participants, PDQ will become a more and more significant source of liquidity and that in turn will make it even more compelling for all users. It should not be long before PDQ becomes a “must use” resource for all market participants.