Markit Transaction Analytics
KCG Acknowledge
Order Impact Analysis
By:
David Weisberger, MD, Markit Trading Analytics
John Jannes, Director, Markit Trading Analytics
Tuesday, March 15, 2016
Confidential \ Copyright © 2016 Markit Ltd
KCG Acknowledge EQ
Order Impact Analysis
Foreword
Let the data speak for itself
By Greg Tusar
When we launched KCG Acknowledge in September of 2015, we said that accountability and
transparency have become more important than ever, which is fundamental to the vision behind this
business. We're committed to working with each of our clients in a long-term, tailored relationship.
Just as importantly, we're committed to being very transparent about how this direct-to-client market
making offering works.
We also pledged: "KCG Acknowledge enables clients to tap into unique liquidity that is often hard to
find in today's fragmented market." But when we put ourselves in our clients' shoes, we realized that
talking about this commitment is one thing, demonstrating it is quite another.
So we decided that we should put our commitment to the ultimate test and see if the data can speak
for itself. We're pleased to discover that yes, it can.
The pages that follow are an empirical analysis we engaged Markit, an independent third party, to
undertake for us. The report analyzes six months of KCG trading data from 2015, including
aggregated and anonymized inbound order data coming into KCG Acknowledge EQ ("ACK EQ")
from our clients, as well as the outbound trading data from the KCG Market Making desks in the
same aggregation unit that placed and received executions on the firm's behalf over that same time
period.
The team at Markit found the following:
1.
2.
3.
KCG ACK EQ offered price improvement v. the NBBO Approximately 38% of the orders executed with KCG ACK EQ over the period analyzed
received price improvement over the NBBO on an average of 8 cents per hundred shares. There was less adverse price movement on orders executed by ACK EQ The difference in adverse price movement, or impact, in multiple time periods up to 10
seconds showed that when orders were executed with ACK EQ, there was less adverse
subsequent midpoint price movement than when they were not executed via ACK (and
thus routed away). KCG ACK EQ offers original liquidity Markit found that KCG ACK EQ provided significant excess liquidity over what was
displayed in the public quotes. /2
KCG Acknowledge EQ
Order Impact Analysis
4.
Markit confirmed there is no link between ACK EQ client information and outbound
KCG Market Making orders Markit found there is no statistical evidence to indicate that KCG changed their outbound
trading based upon inbound orders to ACK EQ. The securities marketplace is a complex universe. Market making, in particular, has been a littleknown world that is even more difficult to map and understand. It is not surprising that a lot of myths
and misconceptions have sprung up about how market makers operate, and what they do with client
orders.
For years, we at KCG have built strong and open bilateral liquidity relationships with our clients. We
hope that by making this data publicly available, we can help shed more light on the value that market
making can provide, and dispel the misperceptions that may have caused some investors to miss out
on the incremental liquidity opportunities and execution quality that may be available.
We hope that more of our peers will elect to likewise share independent analysis of their data in an
effort to bring greater clarity to this part of the liquidity spectrum.
If you're already a client of KCG Acknowledge EQ and would like to analyze the orders you route to
us, please speak with the team at [email protected]. This is a level of transparency and service
we're happy to help provide.
If you have any other questions or need further information, please don't hesitate to contact your
KCG relationship manager, or me.
Greg Tusar leads the businesses at KCG that deliver agency trading services and market making
liquidity directly to clients, including the KCG Acknowledge offerings.
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KCG Acknowledge EQ
Order Impact Analysis
Executive Summary
5
Methodology
6
Results
7- 13 /4
KCG Acknowledge EQ
Order Impact Analysis
Executive Summary
®
Markit analyzed 6 months of inbound anonymized order and execution data from KCG “Acknowledge EQ ”
1
(“ACK EQ”) offering and 6 months of the electronic market making unit’s own outbound orders to evaluate the
2
liquidity it provided to ACK EQ clients . We have concluded, based on statistically significant data, that clients of
ACK EQ benefited from sending orders to the venue as part of their routing strategy. This is based on two
findings in the data.
First, ACK EQ provided price improvement on executions vis a vis the NBBO; The average amount of price
improvement was 8 cents per hundred shares and the percentage of executed shares that were price improved
was roughly 38%. The data demonstrated that orders which were executed received prices better than the
NBBO on average. Second, the orders which were executed created less information leakage than orders which
did not execute, determined by the difference in adverse price movement in subsequent time periods. We
measured the move in the midpoint between the bid and the offer at 1, 10, 100, 1000, and 10,000 milliseconds
and found increasing aggregate difference between the moves when orders were executed and when they were
not. The effect was statistically significant and persistent throughout the measurement period up to the 10
seconds that we measured.
We further confirmed, by analyzing KCG’s outbound proprietary orders, that comparing unexecuted orders to
those receiving execution was a reasonable proxy for determining the liquidity benefit. This is due to the fact that
we found no significant correlation between the unexecuted orders sent to Acknowledge EQ and outbound
orders from the electronic market making desk at KCG. We concluded, therefore, that our analysis indicates
that, during the period measured, Acknowledge EQ provided enhanced liquidity to its clients.
1
KCG Acknowledge EQ ("ACK EQ") is the firm's direct-to-client market making offering for Institutional Broker
Dealers. These Broker Dealers route orders to ACK EQ in an effort to source liquidity on behalf of their
clients. ACK EQ is described in greater detail at www.KCG.com/ackeq.
The offering was formerly marketed under the name “Knight Link by KCG”. KCG Acknowledge and KCG ACK
are registered trademarks of KCG Holdings Inc. All rights reserved.
2
All data provided by KCG to Markit for analysis was aggregated, with no client identifiers associated to the order
or execution information.
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KCG Acknowledge EQ
Order Impact Analysis
Methodology
Markit analyzed anonymized order and execution data provided to us by KCG from ACK EQ for the 1st half of
3
2015. The data included approximately 140 million unique orders for 60 billion shares . During the period of
measurement, ACK EQ provided a total executed quantity of roughly 7 billion shares. All orders and executions
were timestamped at order receipt time to millisecond precision and compared to our own historical tick database
for analysis. Orders received when the quoted spread was greater than 50% of the value of the security were
excluded from the analysis, as such quote conditions would have precluded ACK EQ from trading due to its
internal market data reliability checks.
The dataset was categorized as fully, partially and not executed orders and was further categorized into order
size groups, stock groups and market capitalization groupings. In order to categorize the order size in the
appropriate context, we grouped orders based on the percentage of the aggregate displayed size at time of order
receipt. We used groupings of less than 25%, between 25% and 100% of displayed volume, over 100% but less
than 250%, over 250% but less than 500%, and over 500% of displayed volume.
Within each category and subcategory we performed the following analysis:
— All orders were analyzed by comparing the midpoint of the NBBO in the millisecond immediately preceding
the order to the midpoint of the NBBO 1 millisecond, 10 milliseconds, 100 milliseconds, 1 second and 10
seconds after the receipt of the order.
— The absolute midpoint movement was calculated and we also calculated it as a percentage of the quoted
spread 1 millisecond prior to order receipt.
— All executions were compared to the NBBO from the prior millisecond for price improvement and liquidity
improvement.
In order to determine that the results were not the result of outliers, we further did the analysis on a monthly basis
as well as in aggregate. All results discussed in this report were consistent throughout the period.
3
All data provided by KCG to Markit for analysis was aggregated, with no client identifiers associated to the order
and execution information.
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KCG Acknowledge EQ
Order Impact Analysis
Hypothesis
We developed a testable hypothesis to determine if ACK EQ provided a unique source of liquidity in excess of
the orders displayed on the combined stock exchanges.
If Acknowledge EQ provided unique liquidity, then the market movement
immediately subsequent and for a period of time afterwards, would be substantially
less for fully executed orders than for orders which were either not executed or only
partially filled.
The idea behind the hypothesis is to look for the impact of both immediate smart order routing as well as the
impact created in the market by trying to find liquidity. We believe it is a reasonable assumption that most orders
that did not receive a fill from ACK EQ would typically seek to be filled by accessing the public markets from the
same Smart Order Router. This would result in immediate (sub 10 millisecond) price movement as the router
would send orders to some or all of the exchanges displaying quantity at the NBBO or beyond. We
hypothesized that if KCG provided unique liquidity, then the difference in the post trade movement would be
relatively significant and would be persistent for at least 10 full seconds after the trade.
It is worth noting that we believe that the ideal test of this hypothesis would be to do a random controlled
experiment that enables a substantial percentage of orders to route to ACK EQ with a percentage of orders with
the venue turned off. Since we did not have such a set of order data to work with for this study, we requested
that KCG electronic market making provide us with a set of their outbound orders for the analysis period. We
reasoned that if the outbound orders were not highly correlated to the inbound orders, then the test comparing
executed to unexecuted orders could be considered statistically accurate.
Results
Post order Market Movement (PMM) showed significant differences between the orders that were fully, partially
and not executed. This was true across all market capitalizations and order sizes, but there was a far more
pronounced impact on larger order sizes and a more consistently observed impact for large cap and mid cap
stocks relative to the bid offer spread. We concluded that the PMM demonstrates significant value add for ACK
EQ across the board and is indicative of “unique liquidity” relative to the displayed markets.
Our analysis suggests KCG ACK EQ executions reduce market impact
— Orders receiving executions show consistently less adverse movement of the midpoint post execution than
orders that do not receive executions
— Adverse midpoint movement becomes more pronounced over time and is evident across all market caps
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KCG Acknowledge EQ
Order Impact Analysis
Large Cap PMM 80% 70% % of Spread 60% 50% 40% 30% 20% 10% 0% 1MS 10MS 100MS 1S 10S FULL 1.54% 3.88% 8.13% 11.54% 19.79% PARTIAL 0.78% 10.48% 29.48% 42.30% 47.16% NO_EXEC 3.93% 13.53% 37.42% 55.13% 74.39% Mid Cap PMM 60% 50% % of Spread 40% 30% 20% 10% 0% -­‐10% 1MS 10MS 100MS 1S 10S FULL -­‐0.05% 2.07% 5.75% 8.01% 13.62% PARTIAL -­‐0.23% 9.35% 26.32% 33.11% 39.48% NO_EXEC 1.01% 9.07% 27.44% 38.52% 55.87% /8
KCG Acknowledge EQ
Order Impact Analysis
Small Cap PMM 45% 40% % of Spread 35% 30% 25% 20% 15% 10% 5% 0% 1MS 10MS 100MS 1S 10S FULL 0.28% 1.94% 4.56% 6.04% 8.83% PARTIAL 0.17% 6.26% 17.35% 24.60% 30.23% NO_EXEC 1.17% 6.64% 21.02% 28.66% 40.10% 1S 10S Micro Cap PMM 40% 35% % of Spread 30% 25% 20% 15% 10% 5% 0% 1MS 10MS FULL 100MS 0.18% 1.38% 3.81% 5.09% 8.07% PARTIAL 0.01% 4.97% 17.20% 22.42% 24.80% NO_EXEC 1.23% 5.73% 20.20% 26.67% 36.08% /9
KCG Acknowledge EQ
Order Impact Analysis
Nano Cap PMM 50% 45% 40% % of Spread 35% 30% 25% 20% 15% 10% 5% 0% 1MS 10MS 100MS 1S 10S FULL 0.41% 1.39% 3.48% 4.48% 7.05% PARTIAL 0.30% 4.24% 15.97% 20.63% 23.09% NO_EXEC 0.41% 5.36% 22.85% 30.88% 45.33% Order Size Analysis
We further analyzed the midpoint movement related to average order size related to displayed size. This yields
several interesting conclusions.
KCG ACK EQ provides significant unique liquidity
— KCG was “smart” about choosing the appropriate side of the trade to provide liquidity. This can be seen by
looking at the mid move differential in the <25% of displayed size bucket. Across all of these orders, the post
trade mid move was roughly 22.6% of the average bid offer spread greater in the orders that were
unexecuted compared to those that executed fully. Since those orders were likely to have much smaller
market impact than larger orders, this is likely due at least somewhat to their predictive algorithms.
— KCG provided significant excess liquidity to large orders. This can be seen by the much larger mid move
differential for larger orders. It is highly likely this was caused by the same order going to the displayed
market when they did not find liquidity in ACK EQ. This should be a reasonable proxy to understand the
impact of not accessing that liquidity as part of a sequential routing strategy, so is indicative of excess
liquidity.
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KCG Acknowledge EQ
Order Impact Analysis
% of Spread SP500 PMM Orders<25% Quote & Orders>100% Quote 120% 100% 80% 60% 40% 20% 0% -­‐20% 1MS 10MS 100MS 1S 10S <25% FULL -­‐0.01% 1.20% 3.71% 5.53% 12.34% <25% PARTIAL 0.35% 5.19% 14.27% 21.01% 36.37% <25% NO_EXEC 1.61% 6.13% 13.82% 19.94% 34.90% >100% FULL 1.19% 5.27% 11.75% 18.28% 29.35% >100% PARTIAL -­‐0.15% 11.48% 35.72% 54.52% 54.17% >100% NO_EXEC 4.54% 16.46% 49.92% 76.67% 101.33% % of Spread NMS Non-­‐SP500 PMM Orders<25% Quote & Orders>100% Quote 60% 50% 40% 30% 20% 10% 0% -­‐10% 1MS 10MS 100MS 1S 10S <25% FULL 0.14% 1.03% 2.73% 3.36% 6.20% <25% PARTIAL -­‐0.03% 1.99% 5.92% 8.26% 15.35% <25% NO_EXEC 0.28% 2.64% 8.22% 12.40% 22.52% >100% FULL 1.69% 4.42% 8.08% 10.91% 15.76% >100% PARTIAL 0.30% 7.37% 22.26% 29.60% 32.71% >100% NO_EXEC 1.42% 8.76% 29.54% 40.49% 54.86% Outbound Order Analysis
In addition to analyzing midpoint movement, we also looked at the correlation between KCG’s inbound ACK EQ
customer orders and outbound proprietary orders. As described above, we wanted to ensure that comparing
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KCG Acknowledge EQ
Order Impact Analysis
unexecuted to executed orders was descriptive mainly of the liquidity provided by ACK EQ and not related to
KCG either using the information value in the orders or to selection bias created by KCG predictions.
It was found that KCG created an order in the same symbol as a customer order received within the previous
100 ms roughly 11% of the time, while 89% of the time there was no outbound order created. Furthermore, it was
shown that the vast majority of correlated trades were in instances where KCG was trading in the same direction
as the client (and therefore not providing the client with an execution). As a result, we undertook further analysis
to show that KCG was also trading in the same direction prior to receiving the customer order.
Correlation of KCG outbound orders to customer orders received within previous 100ms Uncorrelated Outbound Orders 89% Correlated Outbound Orders [PERCENTAGE] Same Side No Exec 8% Opposite Side ExecuKon 1% Opposite Side No Exec Same Side ExecuKon 1% 1% As was shown in the analysis, in the majority of instances when KCG created an order within 100ms of receiving
a customer order, the order created was on the same side as the customer order and KCG did not provide an
execution to the customer. This finding indicates that it is likely that the existence of a customer order is
coincidental, and not causal, to KCG’s order creation process, and it is probable any correlation between
customer and KGC order creation is a function of events in the market itself. However, to prove the hypothesis
that KCG is not creating orders because of the existence of a customer order it is necessary to show that KCG
was trading in the same symbol and on the same side as the customer not only after receiving the customer
order, but also prior to receiving the customer order. To examine this relationship we compared KCG orders
created 100ms before and 100ms after receipt of customer orders in the same security and side. It was found
that KCG was nearly three times more likely to already have placed an order at the time the customer order was
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KCG Acknowledge EQ
Order Impact Analysis
received than to create an order after receiving the customer order. We therefore conclude that there is no
evidence to suggest that KCG creates orders in reaction to receiving an ACK EQ order from a customer.
Total outbound orders created before and after customer order receipt OUTBOUND ORDERS 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Orders 0-­‐100ms before 2,018,525 0-­‐100ms aWer 783,459 The conclusion of this analysis is that there is no statistical evidence to indicate that KCG changed their
outbound trading based upon inbound orders to ACK EQ. As a result, we conclude that comparing the
unexecuted orders to the executed orders is a fair comparison for determining the scope of liquidity provided in
excess of the displayed market.
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