Agency broker and trading solutions provider ITG has launched a new version of its Liquidity Filter technology, which it claims will help the buy-side trade large orders across multiple dark pools – including those containing toxic flow – with minimum information leakage.
The new filter is part of POSIT Marketplace, ITG's dark pool aggregator that combines the firm's POSIT dark pool order flow with liquidity partners and external non-displayed markets.
To develop the upgrade, called Liquidity Filter 2.0, ITG analysed the behaviour of orders executed via block trades, algorithms, smart order routers (SORs) and market makers with the aim of improving dark pool execution quality without affecting fill rates.
For example, by looking at the ways SOR is used to capture non-displayed liquidity – i.e. to avoid aggressive order charges from trading venues, provide price improvement or avoid moving the best bid or offer price – ITG inferred that SOR liquidity can be characterised as having a low average trade size and therefore can result in moderate adverse selection and a tendancy to pay the full spread. Similarly, ITG found that order flow from electronic market makers is usually supplied at the full spread, has lower than average execution sizes and can sometimes grab liquidity at the mid-point if the market maker is trying to close out a position.
Using this data, combined with information from dark pool operators on minimum shares, contraparty blacklists, pegging instructions and conditional order information, ITG says it can ensure that client orders interact with specific types of order flow. This will enable investment institutions to trade in dark pools that might otherwise be considered to contain toxic or undesirable flow.
According to ITG, the new filter technology in POSIT Marketplace can reduce the total cost of trading large-cap stocks by three basis points and small- and mid-cap names by over 10 bps. The firm also claims that Liquidity Filter 2.0 can lead to an increase in average trade size by 46%, with 49% of fills in 1,000 share orders or more.