TACT: New Technology Drives Trading Costs Lower With Exclusive Block Liquidity

November 28, 2017

Dear friends of Aqua,


Greetings from the Aquarium!


It’s been some time since you heard from me last.  I am very excited to contact you today to inform you about TACT, an important new technology that facilitates the formation of unique buyside-to-buyside liquidity, developed by Aqua and exclusively available to Aqua clients.  TACT creates opportunities for passive investors or investors with patient orders to lower their trading costs.  Additionally, TACT creates opportunities for investors with urgent orders to trade more shares faster, with less market impact.


After a year of development, we launched TACT earlier this month with a large passive investor quietly providing block liquidity in Russell 2000 names, exclusively in Aqua.  This initial liquidity provider will soon be joined by several additional investors who have agreed to provide block liquidity to other buy-side institutions using Aqua.   Very soon TACT will be available to all buyside Aqua participants, making them potentially both makers and takers of block liquidity.


TACT orders are priced at an offset to the NBBO, giving buyside liquidity providers the ability to buy shares below the bid or sell shares above the offer.  This offset is always significantly less than the counterparty’s expected market impact cost.  The liquidity provider gets a price for a patient order that’s better than the current NBBO.  The liquidity taker gets immediacy provided by a safe natural counterparty, priced at a fraction of expected market impact cost.  Both sides win.


Here’s how it works.  Suppose a buyside trader makes a single EMS or OMS order eligible for TACT.  Out of that single order Aqua’s proprietary model will build a matrix of conditional orders, each meant to correspond to a potential counterparty’s order size.  These conditional orders are priced at an offset calculated by expected market impact cost, multiplied by a discount pricing factor supplied by the liquidity provider.  As a result, potential counterparties are presented with opportunities to trade large blocks of merchandise for less than they would otherwise expect to pay. With this method a liquidity provider can easily price hundreds or even thousands of orders, just by setting the pricing discount factor.  TACT orders are conditional and do not tie up shares or require any sort of commitment to trade in Aqua.  TACT runs quietly in the background while the trader goes about his or her business.


TACT fills an appalling gap in US equity market structure: the almost total absence of price discovery in institutional equity trading.  Price discovery for institutional-size orders has fallen victim to signaling fears, and the costs associated with leakage and signaling.  Understandably – in this era of HFT – traders have migrated to dark trading in order to minimize pre-trade information leakage.  An unfortunate and unintended consequence has been the evisceration of price discovery.  In the dark, all trading happens at or around the midpoint as other prices result in near misses.  Unfortunately, midpoint prices provide no incentive for anyone to come off the sidelines and provide liquidity that isn’t already there.


Little surprise, then, that the supply of block liquidity has failed to materialize to meet demand.  This is Econ 101: supply problems will persist in any market that lacks price signals and price incentives.  The solution is price.  Price acts as a powerful incentive to induce suppliers of liquidity to show up. 


Three distinguishing features separate Aqua from the pack: 

·         One, Aqua’s basic information asymmetry provides liquidity takers with unmatched protection against unwanted or unwitting information leakage. In Aqua, nobody knows when a taker receives a notice to trade.  


·         Two, Aqua’s pricing asymmetry gives buyside traders unmatched incentive to make liquidity available to other investors.  Liquidity providers who have no reason to play in a midpoint dark pool are lining up to play in a system like TACT where they can reap a benefit.  


·         Three, Aqua’s new TACT technology now gives buyside traders ability to lower trading costs by providing block liquidity to other investors with unmatched ease.   


This is block liquidity you won’t find anywhere else.  You’ll never know it’s there unless you are logged in to Aqua and your OMS or EMS orders are linked.


I always enjoy exchanging ideas and learning from Aqua clients and other industry colleagues.  If you plan to attend the “Equities Leaders Summit USA 2017” in Miami the first week in December, please let me know.   I would love to meet up during the conference and hear your thoughts. 


Thanks and regards,


Kevin Foley