The New York Stock Exchange (NYSE) last week filed to launch a block trading segment to execute institutional exchange orders in the dark, but experts suggest it may struggle to shift market share from existing dark venues.
The Institutional Liquidity Program (ILP) will create two new order types for block trading – an institutional liquidity order for blocks of at least 5,000 shares or US$50,000 and the oversized liquidity order for orders between 500 and 5,000 shares, designed to interact with the institutional order type.
NYSE’s efforts come amid the launch a new dark trading venue, IEX, and growth in dark trading volumes executed in broker dark pools or alternative trading systems (ATS), while buy-side block crossing venue Liquidnet continues to attract liquidity with its blotter scraping model.
Vlad Khandros, director of market structure for UBS, said the programme’s model of on-exchange dark execution with a price-size priority would benefit the buy-side in terms of greater choice, but wresting market share from Liquidnet, broker dark pools or ATSs would be a considerable challenge.
“There's definitely client demand for increased block trading liquidity and interaction with higher quality order flow,” Khandros told theTRADEnews.com. “Greater choice of venues and order types may help achieve this rather than trying to force flow into one offering due to a variety of client needs and workflows.”
He said the programme would rely on broker routing, which would be based squarely on the economic decisions such as access fees, but would not take precedence over the possibility of internal crossing.
“There will still be an expectation that if brokers representing one side of a client’s order receive the other side, they will try to cross those orders instead of simply sending flow outbound,” he said. “Complexity is a major concern for clients, but brokers have a duty to help guide clients to decide which venues to route orders to and how depending on their objectives.”
A similar NYSE initiative launched in August last year for retail orders, the Retail Liquidity Program, has shown success, now attracting around 8 million shares traded per day.
The ILP’s fee structure was not included in the submission to the Securities and Exchange Commission, but Justin Schack, managing director and partner for agency broker Rosenblatt Securities, who heads the market structure analysis group, said NYSE could tailor a fee structure to attract buy-side participants.
The fee structure will have a major impact on how brokers engage with this program on behalf of their buy-side clients, but it’s inconceivable that brokers would rout block orders to NYSE before attempting a cross in internal pools, Schack told theTRADEnews.com.
NYSE will allow ‘child’ orders of block trades to execute within the ILP without requiring the entire block to trade on NYSE, which means brokers splicing blocks to execute across a range of venues algorithmically will be eligible.
“As proposed, the ILP would classify as ‘institutional’ orders even non-block-size ‘child’ orders sent by algorithms whose ‘parent’ order meets the block size standard. So it's possible that a significant portion of the volume executed by this program would be in individual lots that are less than block size,” Schack said.
Targeting underlying factors in broker routing decisions will be key, suggested Schack, as an initiative launched by Nasdaq on its PSX market to encourage block trading on a price-time-size priority model had not yet reached its targets as brokers were not adequately incentivised to route orders.
NYSE will attempt to consolidate success in attracting block trades on to its lit market with the on-exchange dark ILP.
According to data compiled by Rosenblatt in its October report on US securities volumes, NYSE ranked first amongst exchanges in attracting lit block liquidity with 11.31% of blocks trades in US securities executed on NYSE, defined as at least $10,000 and 200,000 shares. Nasdaq ranked second with a 5.03% share of block executions.
The new NYSE offering comes weeks after the launch of a new buy-side oriented trading platform, IEX. The venue is aimed at attracting brokers serving the buy-side by restricting predatory aspects of high-frequency trading amongst other factors, and seeks to become a registered exchange.