Bank of America Merrill Lynch (BAML) is consulting with European clients this week on the possible introduction of a new block crossing capability, ahead of incoming MiFID II rules which effectively ban broker crossing networks (BCNs).
The new Instinct Natural service would leverage the existing functionality of the firm’s US alternative trading system, Instinct X.
In May, MEPs are expected to vote through rules which force BCNs, which currently permit brokers to exercise discretion on access and entry rules, to become systematic internalisers or multilateral trading facilities (MTFs), which operate on an open access basis. It also limits the amount of trading that can be done on MTFs using reference price and negotiated price waivers, but does not impose the same restrictions on MTFs that use the large-in-scale pre-trade transparency waiver to effect block trades.
In the US, the Instinct Natural service currently allows clients to rest a parent block order on a conditional basis in one or more venues, while part of the order is simultaneously worked in the lit and dark markets.
“It’s effectively the opposite of an unsolicited indication of interest. The client parks their conditional in the pool and will be first to know when a buyer arrives. The conditional order only becomes firm when we have the other side, so there isn’t the opportunity cost of being out of the market,” said Natan Tiefenbrun, managing director in the Europe execution services arm at BAML.
Unlike some existing block crossing networks, Instinct Natural matches conditional buyers and sellers on an automated basis at the mid-point rather than facilitating negotiation.
“By removing the negotiation element, we ensure that clients honour their conditional orders. So when a match is found, conditionals are converted into firm orders 99% of the time,” said Adam Inzirillo, director, global execution services at BAML, who runs the service in the US.
The firm says Instinct Natural has achieved an average trade size of US$400,000 since the service was introduced in February 2013.
“We’re aiming to develop a crossing service that complies with MiFID II, and which complements rather than competes with traditional order book trading,” added Tiefenbrun.Depending on the consultation process, BAML aims to launch the new service in Europe before the end of the year.