TIP #1: IMPROVING TRADING OUTCOMES FOR TICK SIZE PILOT NAMES
The Tick Size Pilot, which began in October 2016, is designed to determine how wider tick sizes impact market quality for small capitalization securities. Our early analysis has uncovered trends that may help you optimize algo selection for test group stocks.
Some results were no surprise, including wider spreads, larger quote size and less quote volatility. Others were less expected, such as a small increase in average trade sizes, despite the growth in quote size.
We also observed shifts in venue distribution, with stocks in certain pilot groups experiencing increased market share on non-displayed venues. Additionally, more volume was executed on inverted price exchanges, which are venues that charge participants who provide liquidity.
So how can you help improve trading outcomes for tick size pilot names? First, given less volatility and wider spreads, consider avoiding more urgent strategies, or those that tend to cross spreads, such as percentage of volume tracking strategies.
Second, as more flow appears to be migrating to non-displayed venues, think about switching to strategies with dark-seeking capabilities. Finally, passive strategies may make venue selection more important due to larger quote sizes, which can result in long queue times. Consider moving passive orders in test group stocks to inverted price venues, as well as certain non-displayed venues, to increase probability of fill.
For more tips on optimizing your electronic trading across asset classes, check out the rest of our Trader Insights video series.