With the Pipeline system, a trader will activate an orange light to indicate their interest in trading a stock. Other traders in the system can respond to this orange light and execute at the prevailing bid/offer midpoint. The major concern for the traders that initiate the orange light is that they are releasing information to the marketplace on which other traders can capitalize. Based on QSGâs analysis, there does not appear to be any price gaming occurring on the Pipeline system to the detriment of orange light initiators. QSGâs analysis found that for the first quarter of 2006, the difference between the execution price and the VWAP (as defined above) was minimal at $.000006 per share.
The differences were also quite low when examining by liquidity type. For the liquidity initiator (traders who initiated the orange light), the difference between the execution price and the VWAP was only -$0.000786 per share for the quarter. This adverse marketing timing cost is less than one-tenth of the minimum spread. This result demonstrates that orange light initiators are not materially disadvantaged on the Pipeline system.
âHaving the ability for institutions to be able to cross large blocks of stock without market impact is very beneficial to traders of crossing systems such as Pipeline. By using these systems, their traders are saving substantial transaction costs for their firms,â stated Stuart Tolander, a Product Consultant at QSG. âQSG is uniquely positioned as an independent transaction cost analysis provider. QSG does not offer trading services nor is it owned by a broker dealer. As trading costs continue to receive increased scrutiny, we look forward to providing our unbiased analysis to various market participants.â