Liquidity-on-Demand Auction
Pause an order, invite committed quotes, then execute against the best book
- Difficulty
- Expert
- Time to result
- ~months to results
- Steps
- 6
- Confidence
- 99%
Ross describes an order-execution mechanism that reverses the usual search for displayed liquidity. PDQ holds an incoming order for up to twenty milliseconds and sends liquidity providers only the stock symbol, withholding the side, size, and price. Providers answer with committed markets, which are aggregated into a temporary book. The client's instructions then determine which quotes execute. Because providers commit before learning whether the client is buying or selling, Ross argues that they cannot use the inquiry to front-run the order, and competition encourages each provider to return its best price. The mechanism also consolidates liquidity from participants with different speed sensitivities and can reduce the market impact of a large institutional order.
Origin
Christopher Keith, a former New York Stock Exchange CTO, applied for a patent for the PDQ idea in 2001. Ross later joined PDQ after encountering the structure while leading Getco.
Core principles
- 01Make liquidity compete for the order
- 02Reveal only the symbol before providers commit
- 03Use a short pause to reduce the value of speed
- 04Aggregate diverse providers into one executable book
How to run it
- 1
Hold the order
Accept the client's stock order and pause it for up to twenty milliseconds rather than immediately chasing displayed liquidity.
Pro tip Keep the window short enough to remain faster than human trading while allowing models to refresh.
Watch out The transcript describes this process for stocks, not futures or bonds.
- 2
Ask for the market
Send participating liquidity providers only the security symbol and ask each for its market.
Pro tip Withhold the side, size, and price of the client's order.
Watch out Revealing the order's direction would weaken the protection Ross describes.
- 3
Collect commitments
Require providers to return committed orders rather than non-binding indications.
Pro tip Include high-speed, normal-speed, and institutional passive providers where available.
- 4
Aggregate the book
Combine the committed responses into one book so fragmented liquidity can be evaluated together.
Pro tip Compare both price and available size.
- 5
Execute for the client
Apply the client's instructions to the assembled book and select the best available price and size.
Watch out Not every provider response will cross the client's order.
- 6
Route the remainder
If the auction does not fill the order, route the balance to another destination according to the client's preferences.
In the wild
Ross illustrates the auction with an order for ten thousand Apple shares. Providers receive the symbol but do not know whether the client is buying or selling. They commit their best bid and offer, PDQ gathers the responses, and the auction selects the best price for the client.
→ The order attracts committed competition without exposing its direction before providers quote.
Ross says PDQ received about thirty-five thousand orders over five thousand shares during February and providers responded with more than one hundred and thirty-five thousand blocks over five thousand shares on a daily-average basis, although many did not trade.
→ The process surfaced substantial available liquidity even when the responses did not cross and execute.
Common mistakes
Revealing the order
Sharing the side, size, or price before providers commit gives away information that the symbol-only inquiry is designed to protect.
Treating the pause as dead time
Ross distinguishes PDQ's pause from a simple speed bump because the interval is used to solicit, commit, and aggregate liquidity.
Assuming every quote will trade
Provider interest may sit on the same side or away from the market, so available liquidity does not guarantee a match.
Is it for you?
Best for
It is best for institutional stock orders that benefit from competitive, size-aware liquidity without exposing their direction.
Not ideal for
It is not ideal for markets or orders that cannot tolerate the auction pause or fall outside the supported stock-trading structure.
From the transcript
“What we do is we ping our liquidity providers with only the symbol and effectively bring back the question that used to be asked at…”
“We have a dozen providers that are all responding. We can also include institutional passive liquidity providers, and we build a book and once we…”
“We reverse the flow”
From the episode
Interview With Keith Ross: Masters in Business (Audio)