Research
Is the Order Competition Rule a Windfall for Investors?
The SEC's proposed Order Competition Rule aims to increase competition in the market for retail investor orders. Currently, wholesalers can buy order flow from retail brokers and provide a fill within the National Best Bid and Offer (NBBO) without exposing the order to open market competition. The proposed rule would allow marketable retail orders to be segmented on exchanges just as wholesalers currently do. Moreover, it “forces” retail brokers/wholesalers to expose these orders to competitive auctions where institutional investors and other market participants will be able to interact with and provide price improvement over the NBBO in return for lower adverse selection costs (or access to liquidity). In this paper, we provide a summary of the proposed changes, analysis of the impact on retail and institutional investors, and our interpretative commentary and suggestions in the sections below.
The Dangers of Cut & Paste: The 5 Biggest Challenges of Optimizing Futures Execution Algorithms
Some execution algorithm providers approach the design of futures algorithms by starting with an equity algo base and editing the details to tailor to the specificities of trading futures. While this approach may create a fair foundation, on average, it leads to unnecessarily high trading costs—sometimes in extreme fashion—because futures come with their own unique market structure and market microstructure challenges. In this paper, we introduce five of the biggest challenges associated with futures execution and how they can impact execution costs, including volume prediction, navigating long queues for passive execution, handling widely varied volatility profiles, exchange matching rules, and 24-hour trading.
Accessing Single Dealer Platforms (SDPs) in Execution Algorithms: Penny-Wise and Pound-Foolish?
Single dealer platforms (SDPs) are alternative sources of liquidity for US equity execution algorithms, and the negative consequences of using them are not well understood. In this paper, we review the implications of taking liquidity from an SDP as opposed to an exchange or ATS and explain what traders can do about them. We also dispel some of the common marketing misconceptions we most often hear about using SDPs, including that reacting to IOIs eliminates information leakage, that markout analysis shows there's no impact of trading with SDPs on performance, and that brokers' segmentation of order flow has no additional impact on performance.
The Good, The Bad & The Ugly of Payment for Order Flow
This is only paper in the PFOF discussion to quantify its impact on transaction costs for institutional investors. In it, we address how wholesaling is different from market making on exchanges, how much price improvement retail investors really get by routing orders to wholesalers and how it compares to price improvement on exchanges, how much the bid-offer spread would narrow if retail order flow moved to exchanges, and how information asymmetry between wholesalers and exchange market makers affects bid-offer spreads.
Queue-Jumping & Strategic Limit Order Routing
For optimal routing of passive limit orders, one must determine which of the sixteen exchanges is most likely to yield a speedy fill. In this paper, we introduce two methods for dynamically identifying the most likely destination for marketable orders for strategic limit order routing. The results are intuitive in some respects, but surprising in others; exchange rankings are not in order of market share or access fees. Our findings show that those who understand brokers’ routing preferences can jump the queue ahead of your passive limit orders. Smart investors can reverse this disadvantage and improve their passive fill rates.
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Fine-Tuning Participation Rate Constraints for Portfolio Construction in Futures Trading: An Empirical Approach
In this blog post, we present an empirical approach to refining participation rate constraints for portfolio construction and trading for various futures contracts.
Designing Optimal Implementation Shortfall Algorithms with the BestEx Research Adaptive Optimal (IS) Framework
In this article, we're detailing the motivation and the features behind the launch of our new Adaptive Optimal (IS) Framework for designing and optimizing implementation shortfall execution algorithms.
BestEx Research Comment Letter on SEC's Proposed Order Competition Rule
Here we share the comment letter we've submitted to the SEC on the proposed Order Competition Rule. In it, we express our support of the rule and detail suggestions for changes so the rule's implementation has its intended impact.
Who's More Competitive: Wholesalers or Exchanges?
The SEC's proposed Order Competition Rule aims to increase competition in the market for retail investor orders. In this paper, we provide a summary of the proposed changes, discuss how “competitiveness” can be measured, and analyze the potential impact of the rule on institutional investors.
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Who’s More Competitive: Wholesalers or Exchanges?
The SEC's proposed Order Competition Rule aims to increase competition in the market for retail investor orders. In this paper, we provide a summary of the proposed changes, discuss how “competitiveness” can be measured, and analyze the potential impact of the rule on institutional investors.
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The Dangers of Cut & Paste in Futures Algorithms
Some execution algorithm providers approach the design of futures algorithms by starting with an equity algo base and editing the details to tailor to the specificities of trading futures. While this approach may create a fair foundation, it leads to unnecessarily high trading costs. In this paper, we introduce the biggest challenges associated with futures execution and how they can impact execution costs.
A Note of Thanks
A message of thanks to our clients and partners for their support and their votes, awarding us Best Algorithmic Trading Provider in the 2022 Waters Rankings.
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Single Dealer Platforms in Execution Algos: Buyer Beware
Single dealer platforms (SDPs) are alternative sources of liquidity for US equity execution algorithms, and the negative consequences of using them are not well understood. In this paper, we dispel some of the common marketing misconceptions we most often hear about trading with SDPs.
Payment for Order Flow: A Prisoner’s Dilemma
In this short post, CEO Hitesh Mittal shares why change is difficult in the existing market structure where payment for order flow is so common.
Let the PFOF Debate Begin
In this short post, CEO Hitesh Mittal presents the opposing viewpoints in the debate around payment for order flow and refutes some of the commentary in opposition to our recent research paper on this topic.
Unpacking the SEC’s Final Rule about Modernizing Market Infrastructure
In March 2020, the SEC proposed groundbreaking changes that would affect RegNMS, including the content of consolidated market data. In this article, we review the final ruling and its projected impact on institutional investors.
Investors Win with SEC’s NMS II Proposal
Earlier this year, the SEC released a 595-page proposal centered on modifications to RegNMS and improving the SIP. We believe the proposed changes will help all investors, and we have submitted a comment letter to the SEC with a few thoughts that we summarize in this article.
BestEx Research Comment Letter on SEC’s NMS II Proposal
Here, we share the comment letter we have submitted to the SEC regarding their 595-page proposal for modifications to RegNMS and the SIP feed.
Potential Implications of CBOE’s New Market Close Order
CBOE Global Markets, owner of BATS Exchange, recently received approval from the SEC for a preMOC mechanism called CMC (CBOE Market Close). The CMC will launch on March 6, 2020, and it represents a significant change to US equity market structure. In this article, we describe the proposed order type and its potential impacts on institutional investors.
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