Aqua Trading Model Can Produce Unique Block Liquidity

With today’s market structure and the negative impact of information leakage, participants are often punished for reaching out. As a result, large natural orders sit on the sideline, not finding each other. But what if there were an incentive to reach out? What if traders with patient orders received an economic reward for making their liquidity available to urgent orders?

Is institutional equity trading really a zero-sum game? Here at Aqua, we think NOT!

Traditionally, in order for large blocks of natural liquidity to find each other, one side has to step up and make liquidity available to potential counterparties. Unfortunately, with today’s market structure and the negative impact of information leakage, participants are often punished for reaching out. As a result large natural orders sit on the sideline, not finding each other. When naturals can’t find each other, trading costs are higher for both.

But what if there were an incentive to reach out? What if traders with patient orders received an economic reward for making their liquidity available to urgent orders?

The solution is to target only other qualified institutions that have the other side – not out loud and in full view of HFT programs that don’t have enough liquidity to fully satisfy the demand, but quietly and with an economic incentive that compensates for going first.

[Related: “Buy Side Backs Block Trading Venues”] 

Aqua has developed a trading model called Price Discovery that uses price and spread capture as incentive to draw patient liquidity off the sideline and into our marketplace to be executed against natural liquidity.

Price Discovery changes the equation. Price Discovery rewards large patient orders for reaching out. Price Discovery mutes information leakage and reduces transaction costs.

Let’s let an example of a Price Discovery block trade speak for itself.

In this example, on 1/11/2016, a liquidity provider sent an 116,200-share sell order of DNOW into AQUA @ offer +0.02. Using our “Go-fish” matching engine, Aqua presented this opportunity to a qualified natural liquidity taker with a Price Discovery notice. The trader chose to click “BUY” and executed a block of 116,200 (600 were filled in the ISO sweep).

Was this a good trade?

According to Bloomberg, the expected market impact for 116,200 shares of OXFD was ~ 75 bps (using a 3 hour timeframe with a 20% participation rate).

The spread of Offer +0.02 equals 14 bps.

So the liquidity taker PAID 14 bps in order to SAVE 75 bps.

The net SAVINGS for the liquidity taker was 61bps (75 bps expected cost – 14 bps of actual cost).

The net GAIN for the liquidity maker is 89 bps (75 bps expected cost + 14bps of spread capture over the offer).

The result?

The Aqua participants printed the largest block of the week (source: Bloomberg LP).

Both sides outperformed the expected cost

No one lost…Both sides WIN!

Price Discovery works!

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