By John D’Antona Jr.
When it comes to better executions and trading, blocks are better. And so are on-demand auctions.
Don Ross, chief executive officer of PDQ Enterprises LLC, the parent company of CODA Markets, for one.
Ross has long argued that block trading via auction is one of the best ways to improve executions – getting larger size, while minimizing information leakage and adverse selection. He explained to Traders Magazine that CODA’s philosophy is straightforward: to produce better trades by taking the time dimension out of execution.
“Much of the inefficiency in trading today comes from the need to be a nanosecond faster than everyone else in order to avoid being ripped off,” Ross said. “But if you do price discovery and order-matching multilaterally, as we do, costs go down and returns go up. For everyone. Our systems are complex and state of the art, but our concept is simple.”
But it’s not just Ross singing the praises of on-demand auctions. Recently, Greenwich Associates conducted a study on auctions and stated they are a “time-tested, proven market model and are the workhorse for price discovery in the U.S. financial markets.”
The market consultancy quotes one buy-side trader as saying on-demand auctions (like CODA Block) are a unique liquidity source and as such have improved his executions. Furthermore, it was reported that only 1 in 10 buy-side traders currently have access to this kind of liquidity, and many more are not even familiar with them. However, Greenwich states that given auction’s proven ability to source liquidity will spur future adoption.
And more recently, ViableMkts, a strategic advisory firm that provides business analysis, research and guidance to institutions, supported and advocated the usage of on-demand auctions, especially those conducted at CODA Markets.
The firm conducted a study observing trading via CODA Block for the 12 months starting October 1, 2017 and ending September 30, 2018. Among the report’s findings:
¦ 97% of all executions took place at or better than the NBBO despite a share-weighted fill quantity of 441% of the NBBO order size.
CODA Block delivers strong hit rates and unique liquidity
¦ 10% of all initiated auctions resulted in a trade.
¦ 11% of all small-cap auctions resulted in trades.
¦ 12% of all mid-cap auctions resulted in trades.
¦ CODA Block auctions result in minimal leakage and impact
On average, CODA Block post-auction mark-outs moved:
¦ Only 7% of the Spread at 30 seconds (post auction)
¦ Only 12% of the Spread at 60 seconds (post auction)
¦ Average spread width for CODA Block trades was 11.5 bps. Data is consistent throughout the year.
“Initiating auctions on CODA Block could be a valuable tool for trading institutional size with little downside and potentially large benefits,” said David Weisberger, Head of Equities at ViableMkts, pointing to the data. “Auctions which result in trades are beneficial to the initiator, particularly when attempting to trade substantial quantities relative to the displayed market.”
Furthermore, Weisberger added the metrics for both market impact and information leakage with the auctions can be judged benign.
He explained the report separates out auctions that resulted in trades vs. those that did not and measures both the execution quality of trades as well as the movement of the National Best Bid and Offer (NBBO) before, during and after the auction.
“Based upon the analysis, we have concluded that, based on statistically significant data, initiating auctions does not create significant information leakage and that auctions which result in trades are beneficial to the initiator, particularly when attempting to trade substantial quantities relative to the displayed market,” Weisberger said.
“The data shows that using CODA Block generally did not create adverse market moves when initiating an auction, and, when successful, the liquidity found by the process was both incrementally valuable and did not suffer post trade adverse selection on average. These statistics represent the overall numbers, but it is also worth noting that they have been quite consistent on a quarterly basis as well.”
When it came to the examination of adverse election, use of on-demand auction was deemed beneficial for the user.
“In the second quarter, across large, mid and small cap stocks, the data shows little to no adverse selection for trades from initiated auctions,” the report noted.
“Overall and in most cases, the data shows that the market moved positively when fills were received by CODA Block initiators and the adverse moves that occurred were small.”
And lastly is the question of information leakage. Again, usage of on-demand auctions was supported by the ViableMkts analysis of CODA Markets data.
“For the past 12 months, we see no evidence of significant information leakage from initiated auctions. While 75% of the auctions did attract responses in the latest quarter, the movement after the auction, when auction initiators were not fully filled, was only 12% of the spread during the auction, 8% of the spread at 30 seconds after the auction and 12% of the spread at 60 seconds after the auction,” Weisberger said.
To see the full report, please click here: https://www.pdqenterprises.com/wp-content/uploads/2018/11/ViableMkts-CODABlockAnalysis-Oct-17-Sep-18-final.pdf
In the end, CODA Markets’ Ross concluded on-demand auctions are the perfect product for a frustrated buy-side, who find themselves with few to no tools that allow them to safely go active with an order.
“The data clearly shows those who adopted block (on-demand) auctions see improved executions,” Ross said. “Anyone working an order for size sees the value immediately.”