Dude, Where’s My Order?

Ahhhh. I remember the good old days, when a broker in the crowd overheard what MY floor broker was working on my client’s behalf, and bought a little alongside us, and called two buddy clients who also bought a little. That was awesome wasn’t it? You know, while we are on memory lane I also remember sitting on Instinet’s desk, and having a client send an order to lift the 100,000 shares offered on the floor. That client didn’t always get the full 100,000 shares. Sometimes the specialist held up the order, and he bought some, two friends in the crowd also bought, and my client only got 63,000 shares. That was pretty cool too, no?

I guess I didn’t like it all that much either. Which goes to show you that no system is perfect, and without leakage.

However, consider this: today do you really know where your order goes? Does it go through your executing broker (Say BulgeBracketA) directly to an exchange? Does it go through your broker- sponsored vwap /twap /%Vol algo, which then shreds it up and routes to an exchange? Does your blotter get scraped and viewed even before that, by firms that even operate dark pools hoping to match you with some other player, and this before you even send it out to the broker-sponsored algo? Does it then get IOI’d to twenty ELP’s, a rogues gallery from the HFT Hall of Fame? Does it also get sent to other dark pools where “agreements” are in place? Where do those pools in turn IOI? When all is said and done, how many sweaty hands touch your order nowadays? Let’s walk through a realistic example for many.

Mutual Fund Trader (MFT) uses an OMS system where their internal order flow targets and intentions are placed by portfolio managers. In this system, the PM has sent an order to the desk to buy 865,000 shares of MCD.

– Blotter is seen by several scraping dark pools. Bells go off indicating Contra. Trade ensues for a portion, or does not. Perhaps the blotter even owns a dark pool of its own.
– MFT enters 300,000 shares in a Broker A’s TailKick algo, keeping the balance unallocated to any broker or execution venue, just in case blocks show up in some blinging scraping dark pool or natural player.
– TailKick splits the trade up into a U-shaped shredder, which sends out between 16 shares and 400 shares at a clip according to its TailKick logic. It sends out 2,100 orders over the day.
– Each of those 2,100 orders gets passed through any number of the 30 some odd dark pools registered with the SEC, and a few that are not.
– Those dark pools either match them immediately, or send out SOI’s or IOI’s to other dark pools, inviting them to send a return IOI.
– If there is no match, those 2,100 orders get sent to the lit exchanges.
– Those exchanges may or may not share them with their own list of Enhanced Liquidity Providers (market making HFT buddies).
– Those exchanges even in turn re-route those orders back to dark pools (here is a Direct Edge example of that)
– If those 2,100 orders are still not executed, they are then ultimately matched against the displayed quote.

How many sweaty hands touched this 865,000 share order? Any chance for leakage? Does it interact with broker prop flow? HFT prop flow? Do you have a shot of controlling it?

It’s amazing how we took the worst parts of yesteryear and, with the help of the regulators, amplified them exponentially. Do you have a terry towel handy?