What’s the Different Show Facility (ADF)?
The Different Show Facility (ADF) is a bit of market infrastructure run by FINRA. Establishments use it to publish quotes and report trades.
It’s referred to as the Different Show Facility as a result of the ADF is an alternative choice to an alternate for establishments to publish quotes and report trades.
It’s mainly the place establishments can publish quotes and report trades that don’t happen on a daily alternate. These off-exchange venues will be darkish swimming pools, internalized trades (the place your dealer or an affiliated social gathering trades in opposition to you, i.e., cost for order circulate trades), and even straight-up negotiated trades, the place two events get on the cellphone and prepare a commerce away from the alternate.
In fact, when these trades happen, they nonetheless must be reported to the Consolidated Tape (time & gross sales). Nonetheless, as a result of they didn’t occur on an alternate that robotically experiences the trades, they should be reported on a special venue.
These trades don’t have to stick to the Nationwide Greatest Bid and Supply (NBBO) rule from SEC’s Regulation NMS, that means trades reported to the ADF can fluctuate dramatically in value from the present greatest bid and supply.
That is the place the ADF is available in. It allows such commerce reporting.
Keep in mind that, not like an alternate, the ADF doesn’t have any hand in execution. It’s merely a display-only facility the place establishments can publish quotes and report their trades. Any trades which might be reported from the ADF have been really executed elsewhere.
However the ADF isn’t the one recreation on the town. In actual fact, they’re a really insignificant participant within the off-exchange commerce reporting recreation.
The Different Show Facility (ADF) vs. the Commerce Reporting Facility (TRF)
There are two major items of off-exchange commerce reporting infrastructure: the Commerce Reporting Facility (TRF) and the Different Show Facility (ADF).
The distinction is that the TRF is operated by exchanges, whereas FINRA runs the ADF.
The TRF is the place 99.999% of off-exchange trades are reported. These are trades on darkish swimming pools, negotiated trades, internalized trades, and so forth. Any over-the-counter trades, aka, not occurring on a lit alternate, are reported to the TRF.
By far, the TRF is the extra outstanding participant, making it such that the ADF is fairly insignificant within the inventory market.
In actual fact, in accordance with FINRA, the operator of the ADF, there are presently zero quoting broker-dealers on the ADF as of now. There’s, nevertheless, only one dealer, JP Morgan, who makes use of the ADF for commerce reporting.
The ADF isn’t imagined to be a competitor to the TRF. It was established in 2002 for a distinct segment, outdated concern; for ECNs that didn’t need to publish their quotes on NASDAQ’s books as a result of they thought NASDAQ’s algorithms favored NASDAQ market makers as a substitute of ECNs.
Regulation NMS primarily made the ADF out of date and has been sparsely used since Reg NMS’ institution in 2005.
Recognizing A Whale On The ADF
As a result of the ADF is so sparingly used and utilized by solely JP Morgan for commerce reporting, it’s complicated why we’d dedicate any time to the topic.
Let’s flashback to April 18, 2022, within the midst of a deep bear market in SPACs, there was a big liquidation of SPAC warrants in extended-hours buying and selling. SPAC warrants are primarily company-issued unique name choices on SPACs which might be supplied to SPAC buyers as sweeteners.
Like all name choice, a SPAC warrant has a calculable intrinsic worth. If you should buy these warrants beneath their intrinsic worth, it’s like free cash, though SPAC warrants usually can’t be exercised till a deal is introduced.
Regardless, many merchants took up this area of interest of enjoying the arbitrage of mispriced SPAC warrants.
That is why so lots of them have been taking a look at their montages cross-eyed on that April night when large block trades like a block of almost 300,000 warrants for the SPAC McLaren Expertise Acquisition Corp (MLAIW) went for only a penny, with a number of different SPAC warrant block trades going down at ridiculous costs.
And these trades all have been printed on the ADF, which is fairly peculiar.
You may by no means inform the story behind a commerce; that’s the nature of the US inventory market construction. Nevertheless it’s largely assumed {that a} hedge fund wanted to rapidly liquidate a portfolio of SPAC property and negotiated an over-the-counter commerce with one other hedge fund.
Many merchants have been dumbfounded too. That they had purchase orders for these warrants effectively above the reported costs however have been by no means crammed, so what occurred? These merchants’ bids have been sitting on the order books of inventory exchanges just like the NYSE. However this commerce was negotiated and by no means touched an alternate, therefore by no means triggering any purchase orders. And since these trades don’t have to stick to the NBBO, it’s utterly authorized.
From these block trades, an astute dealer could make some insights; that not less than one massive fund closely concerned in SPACs is having liquidity issues and extra fire-sales could be to return, which might absolutely be bearish for the SPAC market.
However you may make the identical insights from trades reported on the TRF. So once more, why the emphasis on the ADF?
As a result of JP Morgan is the one reporting participant on the ADF.
It’s not precisely clear why the ADF was used to report these trades, however on the rarer events when the ADF is used, the trades have a tendency to carry extra weight for no matter cause.
So you possibly can merely have a look at reported volumes and if there’s plenty of trades being reported to the ADF, then you realize that JP Morgan is actively buying and selling the safety. And for some cause in the event that they’re reporting on the ADF, a catalyst could be upcoming.
Backside Line
This market construction minutia will be boring, and the data revealed out there’s all so technical in nature, making it laborious to grasp in sensible phrases.
For that cause, few merchants take the time to discover, perceive, and implement methods primarily based on these items. It’s nowhere as thrilling as finding out the most recent chart sample or technical indicator. And that’s exactly why it may be so rewarding.
With that mentioned, the ADF is hardly used these days, with JP Morgan being the one participant, so you possibly can’t anticipate to create a constant buying and selling technique from it, however these uncommon instances whenever you do spot a possibility, doing that little little bit of finding out could have paid off.
