As the one-year anniversary nears of the publication of Michael Lewis’ Flash Boys, one of the central players in that story, dark-pool operator IEX Group, has inked a deal with Abel Noser Solutions to license its universe of data which it will use to measure the effectiveness of its crossing systems.
Abel Noser will provide this data to IEX on a quarterly basis in order for IEX to enhance analysis of trading on its own market as compared to that on other venues.
“We have a shared outlook with IEX about the way that the equity exchanges are organized today, that fragmentation has not really been good for institutional investors, nor have high-frequency traders and the way that market making occurs today,” Ted Morgan, chief operating officer at Abel Noser Solutions, told Markets Media. “We're finding that they're having a pretty favorable cross rate, certainly better than any other dark pool that we've worked with recently.”
Abel Noser Solutions provides transaction cost analysis, which looks at how efficiently exchanges, brokers, crossing networks and institutions execute trades. The company collects, aggregates and benchmarks data from clients to see which has the lowest execution costs.
Increasingly, TCA is being used to evaluate specific execution venues in an effort to detect information leakage and adverse selection.
“User are interested in stacking venues up against each other to see if one of them might have a better spread capture or might be suspicious in terms of information leakage, and maybe there's some gaming going on there,” Morgan said.
The key word is 'slippage', or the difference in price when an order was placed and when it was executed—as well as taking into account commissions, fees, bid-ask spreads and taxes.
“The single biggest change is the greater interest in the market micro-structure issues, as fragmentation has started to dominate the narrative in equity trading,” said Morgan. “Clients used to be concerned with the big picture: What was the total cost of my order? Did I use the right algo? Is my manager timing these orders well? That focus has changed. Clients are now keenly interested in which venues their individual quotes are getting executed in. They're keenly interested in how much of a spread that they’re paying, and whether or not they’re leaking information and whether the price changed in the milliseconds after they have placed their order.”
In a release, IEX chief executive Brad Katsuyama said: “We at IEX take pride in our cutting-edge technology and balanced market design, but it only matters to investors and their fiduciaries if we can support our trading performance with third party metrics that are also trusted. We are proud to partner with Abel Noser to validate, measure and benchmark the high quality execution that more and more stakeholders are receiving by trading on IEX.”
In January 2015, IEX averaged volumes of 133 million shares, or roughly 1% of all equity trading volumes. According to an SEC paper on Alternative Trading Systems (ATS; also known as “dark pools”), IEX’s average order size and fill size exceeded that of the five largest ATS and the average of all venues, including traditional exchanges.
Featured image via r2hox/Flickr under creative commons
