Goldman Sachs MTF move not driven by MiFID II

Goldman Sachs has announced that it plans to use a subset of the flow from its European internal crossing engine SIGMA to launch a dark multilateral trading facility, citing commercial motivations.
By None

Goldman Sachs has announced that it plans to use a subset of the flow from its European internal crossing engine SIGMA to launch a dark multilateral trading facility (MTF), citing commercial motivations.

The new dark pool, SIGMA X MTF, will be supported by NYSE Technologies, the commercial technology division of exchange group NYSE Euronext. Goldman Sachs will be the first broker-dealer to host a trading venue on NYSE Euronext's Universal Trading Platform, its single trading engine and market connectivity point. According to NYSE Technologies, the offering will be made available to Goldman Sachs in Q2 2011 and will include co-location and market data components. It will be housed in the exchange group's data centre in Basildon, UK, and use its SFTI connectivity network.

The precise nature of liquidity that would be used from the bank's current dark pool SIGMA, which is not classified under MiFID and operates as an over-the-counter trading venue, is yet to be determined but will be based on client preference. SIGMA X MTF is currently awaiting approval from UK regulator the Financial Services Authority.

David Shrimpton, incoming chief operating officer of SIGMA X MTF, Goldman Sachs, said that the liquidity amassed on the SIGMA broker crossing network (BCN) over the last few years presented Goldman Sachs with an opportunity to further deepen the liquidity it could provide to clients.

Shrimpton, formerly head of equity market development at the London Stock Exchange, was hired recently by Goldman Sachs specifically to spearhead SIGMA X MTF.

“We always look to enhance the depth and quality of execution for our clients – we believe the introduction of the MTF will generate additional liquidity and extend the franchise that we have built up over the last few years,” Shrimpton told, adding that the SIGMA BCN currently crosses around US$500 million (€377.61 million) worth of orders per day.

By comparison the six BCNs that report to trade data monitor Markit BOAT on a daily basis, comprising: Deutsche Bank (DBA); J.P. Morgan (JPM-X); Morgan Stanley (MS Pool); UBS (UBS PIN); Credit Suisse (Crossfinder) and Citi (Citi Match), traded €590.37 million on Friday 10 December. Chi-X Europe’s Chi-Delta, currently the largest MTF in Europe, traded €268.59 million on the same day.

Goldman Sachs' move follows the likelihood of a tighter regulatory regime for BCNs after the publication of the European Commission’s (EC) consultation paper on MiFID that was launched on 8 December. Rival banks Nomura and UBS have already launched separate MTF offerings within the last year that are designed to complement their existing internalisation capabilities.

The EC consultation, which will lead to draft proposals for a new version of MiFID by Q2 2011, suggested a new category for BCNs that recognises their differences compared to other trading venues.

“Such systems [BCNs] can be viewed as a hybrid between a facility to assist execution of clients’ orders and a multilateral system that brings together orders,” read the EC document.

It also proposed the possibility of reclassifying BCNs into MTFs should they reach a certain size.

However, while recognising the trend from regulators and politicians to try and shift more trading onto organised venues, Shrimpton added that the ability for banks to retain discretion over how they match orders in their BCNs, compared to the non-discriminatory nature of MTFs, is an important aspect to achieving best execution.

While banks say that the discretion they hold over how to match orders in their crossing networks is simply an electronic version of the manual internalisation function performed on upstairs trading desks, critics, such as trade body the Federation of European Securities Exchanges, argue that BCNs behave in the same way as regulated markets and MTFs, therefore they should be governed as such.