I like examples.
My client routed her small stray sell order (about 5,000 shares) to a well-known electronic brokerage firm’s stealthy algorithm, which utilizes dark pool aggregation, and has a very cool macho helicopter-military-like name. These are the facts.
The stock: small cap OTC restaurant stock, ticker left out of the discussion. Average daily volume = 62,000 shares
The bid/ask: 28.66 28.68 200 shares up
The situation :
1) Very cool macho helicopter-military-like named Algo gets the order. It is a “dark” algo.
2) The stock drops from 28.66 – 28.68, to 28.61 – 28.64. No shares trade. The stock dropped only when she entered the order into the dark algo.
3) She then cancelled the order from the algo.
4) The stock rebounded back to 28.67 – 28.69. Again no shares have traded.
5) Sell order now entered using an aggressive router which uses intermarket sweep (ISO order), which simultaneously routes stock to the 67 cents and 66 cent bids in the book.
6) Execution = sell of 4,770 shares at 28.6625
7) Mission accomplished.
The Moral: Stealthy and Dark is not always good. In fact there are studies out there that question the “low cost of dark algorithmic trading”, and demonstrate that they cost more. In the above example, the trader’s first move was to enter the sell order into a reputable dark algo, which had prided itself on being stealthy and discreet. The stock dropped with the trader still executing nada and holding the bag. The trader’s second move was to use a different, more aggressive method, which was programmed to purposely avoid specific dark pools. The result was a great, tight execution, that was achieved after much angst, much needless labor, and much cursing.
When dark algorithms call themselves stealthy, I can’t help but think of the scene in The Princess Bride where Vizzini keeps saying “Inconceiveable”, and Inigo Montoya responds, “You keep using that word. I do not think it means what you think it means.”
A big thank you to my dear princess in northern Florida, for contributing this tale to me in my caffeine-induced state. You know who you are.