In a white paper published today, Cinnober-leading independent provider of marketplace and clearing technology-presents a new innovative market model based on a concept called Adaptive Micro Auction (AMA). The AMA model is an alternative to continous trading for market operators that want to create a level playing field among all market participants, regardless of what latency conditions they are working with.
Adaptive Micro Auctions are repeated very short-lived auctions-measured in milliseconds (ms)-that can be used to provide an efficient price discovery process that is insensitive to differentiated access among market participants in terms of latency. The AMAs are dynamically adjusted in length to be as short as possible while still providing all market participants equal ability to act on new information.
"We believe there is an opportunity for some marketplaces to differentiate themselves with a whole new approach, and by this attract customers who otherwise would direct much of their liquidity to dark pools", said Jan Arpi, CEO of Cinnober. "In the wake of deregulation and with the rise of high frequency trading, we've seen new challenges for some types of investors. While we offer door-to-door latency down to low micro seconds in our trading system, we believe there are more ways than speed for marketplaces to compete. The AMA model creates a market in which focus is on efficient price discovery."
AMAs utilize the efficient price discovery mechanism inherrent in traditional auctions and combine it with near-immediate execution. By using the auction procedure, liquidity is concentrated in time: all orders in the auction are executed at once at a single equilibrum price. This helps decrease the number of trades generated by a large order and improves liquidity in today's otherwise fragmented equity markets.
The AMA model also protects the holder of an order from information leakage and from being outrun by ultra fast HFTs. The AMAs can be set to only distribute the equilibrum price to the market, and since all participants are given time to react to new orders, having the fastest access (lowest latency) isn't an advantage in this model.
The Adaptive Micro Auction model is part of the latest version of Cinnober's TRADExpress Trading System.