Introduction

As we approach the end of our first full calendar year in operation, many of our clients want to know, “Apart from volume, how’d you do?” While volume and execution size are two of the most common growth metrics we are asked about on a regular basis, we find that our proprietary statistics, like Same-Side Percentage and Average Top Quantity, are just as meaningful, and in some ways, provide even more insight into the trading experience at Luminex and the overall growth of the pool.

We review three of our key metrics, why they are important to measure, and how each one fared in 2016.

Luminex Proprietary Metrics
• Same Side Percentage
• Average Top Quantity
• Average Order Size Attempted

Same Side Percentage

Definition: A Luminex proprietary metric that measures on a given day the percentage of occurrences where multiple orders in the same symbol are on the same side of the market.

2016 Results: Unchanged at 50%

At the end of 2016, similar to our findings back in May 2016, we found that, on a daily basis, roughly 50% of the time, two or more users who entered an order, in the same symbol, were on the same side of the market. What we found most interesting is that, on average, the Same Side Percentage remained relatively unchanged, despite an increase in the number of Luminex subscribers over the past year (currently 153 versus 80 at launch date.) One might expect the wider range of subscribers to influence the Same Side metric in any one direction, but the fact that it remained the same further reinforced our opinion that institutions are not always on the same side of the market and that block trading among the buy-side is alive and well. (Chart below)

Luminex "Same Side"Percentage

 

Why is Same Side Percentage Important?
This question – how often are traders on the same side of the market – remains the one asked most frequently by our subscribers. In our May 2016 piece, we introduced the Same Side Percentage metric because many are of the belief that large buy-side institutions with a long-term investment strategy typically buy and sell stocks at the same time. Naturally, we at Luminex were very interested in this popular dynamic because when Luminex first launched some questioned whether the “same-side” phenomenon would inhibit our success. We argued that, sometimes traders do wind up on the same side of the market; however, the difficulties associated with trading blocks are more often due to the consequences of an overly fragmented market and a complex framework that is better suited for small orders. We still believe this is the case today. The rate of odd lot trades remains at close to an all-time high – approximately 30% on-exchange – and algorithms and smart-order-routers (SORs) are consistently breaking up larger orders into smaller ones. While this behavior allows participants to access multiple venues at once and mask their trading intentions, it is most likely the root cause for why block trading may be difficult and not because traders are on the same side of the market.

Average Top Quantity (Average Order Size)

Definition: Average Top Quantity is the average of the Parent Order Size (shares) for all orders submitted to Luminex for a designated period. Here is an example:

   BUY 100,000 shares of XYZ @ 10.00, with an Auto-Ex Quantity equal to 5,000
   Top Quantity = 100,000 shares

2016 Performance: Average Top Quantity rose from 119,000 shares to an all-time high of 266,105 shares, an increase of 123.6%.

Weekly Average Top Quantity

 

Why is Average Top Quantity Important? 
We were pleased with our growth in the Average Top Quantity because we believe it speaks to a participant’s willingness to trade blocks, but also, to the overall comfort level when placing and resting orders at a venue, especially ones that are large in quantity. However, unlike its average trade size cousin, Average Top Quantity provides insight into an order prior to executing; a metric we would argue is just as important as average trade size. As we stated earlier, the prevention of information leakage, variations in participant types, and the need to access multiple pools of liquidity – just to name a few – has caused traders, and subsequently SORs, to break up orders into smaller pieces. In fact, in a recent paper, the authors found that there were no significant differences in order size between exchange and off-exchange venues. Therefore, if a venue primarily receives small orders, a decline in order and execution size becomes practically inevitable. Our average order size continues to grow, which we attribute to our selective community and the fundamentals of our market model.

Additionally, as part of the rapid innovation and competition over the past few years, alternative venues proliferated and evolved to include multiple types of participants and trading strategies. Therefore, one could reasonably argue that a venue’s average order size – in addition to average execution size – is another way of determining what one might expect regarding the general interaction with a venue’s constituents. Therefore, the larger the order submitted, the higher the expectation that a trader will be willing to trade in block-size fashion.

Average Order Size Attempted

Definition: Order Size Attempted is the final order amount submitted for a negotiated trade. The average is the sum of all order sizes submitted across all negotiated trades divided by the total number of trades regardless of parent order size. Here is an example:

Example

 

2016 Performance: The weekly Average Order Size Attempted rose from 78,403 shares to 207,169 shares, an increase of 108.5%.

Why is Average Order Size Attempted Important?
Average Order Size Attempted is important because it takes into account the share quantities submitted by all traders who participate in a negotiation. In other words, what is the average order size that participants are truly willing to trade when given the opportunity to do so? Execution size differs in that it measures the final size upon completion of a trade, regardless of the quantity submitted by both parties, and although a critical tool for determining a venue’s ability to trade blocks, it effectively measures the “least common denominator.” Measuring the final order size submitted upon negotiation for all parties allows us to make sure that all of our subscribers are trading in a manner that maintains the integrity and spirit of the Luminex trading principles.

Final Thoughts
Recent events, the dynamics of a changing market structure, and an overwhelming reservoir of data have made the process of venue selection incredibly challenging for traders. Execution data, although critical, is a good start, but unfortunately solves only one piece of the best-execution puzzle. Honoring best execution is extending beyond the publication of existing data sets and entering a world where all participants are becoming obligated to explain the reasons behind their trading venue of choice. The competition for order flow and trade related services continues to intensify, and now, all venues – lit and dark – must be able to offer order and trade related information that will prove to new and existing trading partners that their execution process is not only unique, but also superior.

Thanks to the support of our subscribers, several of our order- and volume-based metrics have grown over the past year and we wanted to take this opportunity to share some of the important metrics that help make the Luminex experience unique.

As always, we appreciate your continued patience and support, and if you have any questions, please let us know.

Anna Ziotis Kurzrok
Market Strategy & Senior Sales
Luminex Trading & Analytics LLC

For investment professional or institutional investor use only. Not authorized for distribution to the public as sales material.

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