Watch ADF for "Broker-Neutral" Algorithms

There has been a steady rise of order flow on the Nasdaq's Alternative Display Facility (ADF), an avenue for electronic trading systems. Why should an investor relations department take notice? Because ADF is a broad proxy for risk-managed algorithmic trading in your stock.

While the ADF is not an execution or routing platform, it is a simple way for electronic trading systems to intersect liquidity pools and markets. Market-leading providers of "broker-neutral" algorithmic execution platforms include Bloomberg, Fidessa, Citgroup's Lava Trading and Flextrade

What does that mean? In essence, they provide market participants with trade-execution services that dynamically adapt to liquidity without regard to what broker-dealer offers it. We have observed many middle market broker dealers adopt outsourced solutions from these firms in hopes of competitiveness on today's electronic trading battlefield. In our sample data group, the ADF routinely ranks second in our Top 25 Volume report and may soon surpass the top electronic platform, Archipelago.

Nasdaq issuers, you can see the ADF in your market participant list under market participant ID "ADFN." NYSE issuers, alas, NYSEnet does not break out components of Nasdaq order flow for you. However, anecdotally, watch your NYSE order flow versus what we call third-market execution. Most providers using the Nasdaq's ADF are now facilitating trading in both Nasdaq and listed issues electronically via the ADF, so you may see further reductions in the NYSE's share of your daily trading.

In closing, indices have been strong laTely. We've seen Goldman Sachs exert amazing force once again in the markets, just as it's done previously when broad measures including the Dow have approached new highs. Call us cynical, but we know these sell side providers and their institutional clients understand that aggressive capital inflows near new watershed levels will attract additional, naïve capital that they can convert to trading profits. Word to the wise: Only foolish traders and investors front-run Goldman Sachs.

We believe these forces – not subtle changes in economic data that you hear on the news all the time as reasons for movement in the markets – are very significant drivers. And investor relations practitioners, you must at minimum understand them if you wish to have confidently in the public equity markets.

Source by Tim Quast

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