US-based exchange operator NYSE Euronext and BIDS Trading, a broker-dealer and alternative trading system operator, hope to revolutionise block trading in the US with the New York Block Exchange (NYBX), their new dark pool joint venture.
NYBX, which started trading last Thursday, will allow orders placed in its non-displayed pool to anonymously access displayed liquidity, reserve orders and hidden interest on the NYSE order book, creating a new method of block trade aggregation and allowing dark liquidity to contribute to price formation.
“The concept of marrying dark block discovery with lit price discovery is a powerful one, which in theory could attract a lot of users,” commented Justin Schack, vice president, market structure analysis, Rosenblatt Securities and co-author of ‘Let there be light’, the boutique brokerage’s monthly dark liquidity tracker. “There’s a limit to how much volume a pure block crossing network can attract if it doesn’t interact with the displayed market.”
Tim Mahoney, CEO, BIDS Trading, told theTRADEnews.com that he considered the traditional block trading model to be flawed when it comes to price discovery. “It doesn’t make sense that a million share order executes at the same price point as a 100 share order,” he said. “We are attempting to electronically recreate how blocks were originally traded in the 80s and 90s, by hunting for large orders in lit liquidity and reserve orders on the NYSE, as well as in the NYBX dark pool.”
“By creating blocks from the exchange that can connect with NYBX liquidity, people can specify how much they want to get done within certain price parameters,” added Joe Mecane, vice president and chief administrative officer, US markets, NYSE Euronext.
To help preserve anonymity and manage information leakage, the joint venture partners developed original technology specifically for the NYBX platform. Traders will also be able to set their own order size limitations, which will offer some protection against gaming and front-running.
Many US dark pools, particularly broker-owned crossing engines, have established links in an effort to aggregate dark liquidity and increase the fill rates of non-displayed venues. Goldman Sachs, Morgan Stanley and UBS struck bilateral agreements to grant each other’s clients access to their dark pools in May last year. However, Mecane claims that the NYBX approach will bring its own advantages.
“Linking dark pools can have benefits, especially for IOIs, but when we looked at what was missing in the block trading paradigm, linking the exchange and dark liquidity was an obvious place to start and a natural progression in the model,” he said. “You don’t have to trade at the bid, offer or mid-point price, meaning the trade criteria are less restrictive. At the same time, it helps the execution rates on our NYSE platform.”?
Mecane also confirmed that the two firms were looking at linking further NYSE platforms to NYBX, including its alternative equities trading system, NYSE Arca. NYSE Euronext and BIDS Holdings and each have a 50% ownership stake in NYBX. NYSE Euronext also made an investment in BIDS Holdings in October 2006. The platform will be open to both NYSE and BIDS Trading subscribers via sponsored access