QSG Study Offers Evidence of Dark Pool Benefits
June 23, 2008
Seeking to measure the benefits of trading on non-displayed alternative trading systems, Quantitative Services Group (QSG), a consulting firm and equity-analytics provider, has completed an analysis of Nyfix Millennium's first-quarter execution data.
According to Dan Bukowski, director of research at QSG, the study suggests that the Millennium platform, which is operated by New York-based electronic trading solutions provider Nyfix, achieved its goal of "reducing average execution costs, specifically market impact costs, across an array of categories."
Using a technique it is seeking to patent, QSG evaluated individual trades within larger orders that flowed through the venue to determine their footprint, or cumulative price change. The Naperville, Ill.-based firm says that it also looked at Nyfix Millennium's ability to deliver value in stocks with "price or earnings momentum characteristics," which are often difficult to trade on traditional exchanges.
"There are a lot of questions surrounding the use of these alternative venues and we wanted to, wherever possible, be able to better understand whether they're providing the values advertised," said Tim Sargent, president of QSG, which offers a suite of equity research services, custom stock-selection models and independent trading cost analytics. QSG obtained the Millennium data through its consulting relationship with Nyfix, he explained. "We were able to get what we considered a very good sample of execution data from one of the larger providers," he noted.
Added Sargent: "The Nyfix Millennium value proposition centers on its ability to execute orders at a mid-market quote in an anonymous setting. Our study of their first-quarter data confirms that executions in Millennium exhibited lower cumulative price impacts than similar executions represented in our composite for the period."
QSG hopes to conduct similar analyses with other dark books, according to Sargent, though that will depend on the firm's gaining access to their data sets. "We think it's to the benefit of the investment community to be able to write this kind of research," he said. "We haven't organized a formal effort to contact each dark pool but my guess is that this kind of research is valuable to those who are interested, so we'll probably ... be able to do that over the next year."
"QSG's research reinforces one of the primary motivations firms have for executing in dark venues, which is reducing market impact," said C. Thomas Richardson, EVP of strategy at the Boston Stock Exchange. Following the pending acquisition of its parent, BSE Group, by Nasdaq OMX Group, Richardson will become global head of transaction services at Nyfix; until then he is acting as an adviser. "We're pleased to see that Millennium exhibited lower market impact than QSG's transaction universe, proving that Millennium is truly a dark pool that can reduce execution costs and improve our clients' overall experience," he said.
"They're putting some numbers to what everyone knows," said Matt Samelson, senior analyst at Boston-based Aite Group, noting that for Nyfix, "this quantifies the cost improvement that using their dark venue gives versus the general market, and numbers are always better than suppositions. ... Everybody's trying to compare dark pool performance. A lot of this relies on the ability to get dark pool data, and some dark pools are not going to release that."
"To succeed in a world of sophisticated trading techniques, fragmented pools of liquidity and automated trade routing, traders require a better set of tools that can track not only the depth and breadth of liquidity of a venue, but also allow for the interaction of trading strategy and the buy-sell catalyst," said Sargent in a prepared statement. "We are helping clients demystify the use of automated trading algorithms and alternative liquidity sources so they can leverage these powerful tools with confidence."
