Pipeline, a block-trading venue operator and agency brokerage, will launch its multilateral trading facility (MTF) in early May, offering European market participants a fresh way of executing block trades that includes an element of pre-trade transparency.
Pipeline has been offering a restricted service in Europe since early 2009, consisting of its Algorithmic Switching Engine, an order execution and dark pool aggregation tool.
“In the last four or five months, we've made an extra effort to sign up the sell-side, as we've continued to develop our relationships with the buy-side,” Marcus Hooper, executive director, Pipeline Europe, told theTRADEnews.com. “We have also added new anti-gaming technology for the Block Board and we are confident that the system cannot be manipulated by predatory traders.”
According to Hooper, between 35-40% of members from launch will comprise sell-side participants and the MTF expects to have a total of 200 firms connected within the first six months.
Similar to its US operation, Pipeline will now offer the Block Board MTF and the Algorithmic Switching Engine, which selects the most appropriate algorithmic strategy for a particular trade.
Execution costs for both will be determined based on the ratio of trading done on the Block Board compared to the Algorithmic Switching Engine. Proactive traders, or those that supply liquidity to the system, will receive fee discounts under a liquidity provider programme.
Unlike other dark pools, the Block Board will have an element of pre-trade transparency, which Hooper believes is the unique feature of the MTF. The pre-trade information will give members an indication of liquidity in the system without revealing enough information to enable orders to be gamed.
Members will be alerted to potential trading opportunities in the stocks they are watching with one of three flags – two of which form an important part of the MTF's anti-gaming functionality.
An orange flag indicates live available liquidity at the mid-point, without revealing buy/sell direction or quantity to the trading counterparty. A yellow flag indicates that a match is available to parties that have live orders, but not at the mid-point, while a black flag indicates to a trader that there is a potential match, but with a smaller quantity than desired. The minimum size of an order in Pipeline is around 0.5% of the average daily value traded of a stock, but users have the ability to specify a larger minimum acceptable quantity (MAQ).
The use of different trading flags, believes Hooper, will ensure Pipeline's market model is aligned with a desire by the European Commission (EC) to provide as much transparency to the market as possible, particularly when considering actionable indications of interest.
In its recent MiFID consultation document, the EC recommended pre-trade transparency requirements for actionable IOIs, to ensure equal access to liquidity. If the proposal becomes law, it could hamper direct negotiation of large trades on block crossing networks that using blotter-scraping technology, says Hooper.
“The EC has expressed concern about actionable IOIs and the regulatory issues they raise,” said Hooper. “We are trying to put a level of transparency around orders that wouldn't normally be transparent that will allow trading firms to trade large orders in a broader way than a closed user group.”
The use of multiple flags can help to limit potential gaming scenarios.
For example, if a trader sees an orange flag in a stock he/she was interested in, but received no direct match or yellow flag indicating a price difference when trying to interact with it, the trader could infer that the order is of a similar direction to the one he/she posted and gain useful information.
But there is also a possibility that the order could be smaller than the MAQ specified. In this situation, the trader initiating the order would receive a black flag, but the trader looking for the liquidity would not. Therefore, the possibility of receiving a black flag means the trader can never be sure of an order's direction.
Any residual liquidity that remains after a match is found on the Block Board can be executed using Pipeline's Algorithmic Switching Engine, which operates under a separate brokerage licence held by the firm. The engine uses predictive technology to select the most appropriate strategy from a variety of externally-supplied algorithms. This gives buy-side traders another way of limiting market impact, as residual orders will be spread across multiple venues and algorithms.
Buy-side users of the Algorithmic Switching Engine can also use Pipeline's Alpha Pro, a predictive tool that analyses incoming orders in light of current market conditions and historical patterns. It can identify the factors most likely to predict impact-free price movement and recommend a trading strategy to maximise alpha capture and minimise adverse selection.