Size is important for next-generation ATSs

Innovation among aspirant trading venues is focusing on size rather than speed as new alternative trading systems compete to deliver blocks to the buy-side, a new report claims.

Innovation among aspirant trading venues is focusing on size rather than speed as new alternative trading systems (ATSs) compete to deliver blocks to the buy-side, a new report claims.

In a research note, titled ‘Next-generation ATS: Innovate or Die!’, research and advisory firm Aite Group has compared the business models of four new trading platforms seeking to win market share from exchanges and established trading venues. Three of the four ATSs profiled in the report – IEX, Thomson Reuters Block Connect and Tripleshot – are explicitly focused on facilitating block trading. The fourth, Aquis Exchange, offers a subscription-based pricing model.

Commenting on the fragmentation that has spread across mature equities markets over the past decade, report author and founder of Aite Group Sang Lee noted the recent failure of ‘me-too’ providers to build on the in-roads made by innovators such as Instinet, Island, Archipelago, BATS, Chi-X, ITG and Liquidnet. Lee suggested the current crop of challengers have at least some of the required characteristics to mount a sustained challenge to the status quo.

“While success is far from certain, these new ATSs will no doubt leave a strong impression on a marketplace that needs a shot in the arm to spur on additional growth,” he said.

Trading speed and pricing innovation – aligned with ownership interest among the broker community – have been core factors in the success of a number of ATSs in the US and Europe, but new ATSs differ in a number of ways. None of the four firms profiled by Aite use broker ownership as a means to guarantee liquidity and three differentiate through facilitating larger orders.

IEX, which has received much media attention recently due to its central role in Michael Lewis’s book on high-frequency trading, operates a limit order book with non-displayed order types and routing capabilities. Based on technology which eliminates differences between participants in trading speed, IEX’s average order size was 91% higher than that of the five largest US ATSs in February. 

Launched in March, Thomson Reuters Block Connect builds on the firm’s Autex order routing network to minimise information leakage for the buy-side when trading blocks. The platform lets the buy-side trade actionable indications of interest to improve pre-trade anonymity, while enabling the sell-side to negotiate for follow-on volume.

Tripleshot – based in Boston and owned by a combination of employees, angel investors and early stage venture capital firm Atlas Ventures – avoids information leakage in the block trading process by sending out order alerts that include both the real trade interest of a buy-side firm as well as two similar orders which serve as camouflage. On receiving an alert, a buy-side trader must manually place the order with Tripleshot with a view to crossing at the midpoint. The firm has more than 50 buy-side firms signed up and claims an average execution size of 37,000 shares.

Aite’s Lee describes Aquis Exchange’s innovation – pricing based on message traffic similar to tiered subscription contracts – as “perhaps the most radical of all ideas”. Launched last November by former Chi-X Europe CEO Alasdair Haynes, Aquis is attempting to break the duopoly that has formed between BATS Chi-X Europe and the incumbent exchange in a number of European markets.

Aite’s report was based on qualitative interviews with the platforms, supplemented by feedback from sell- and buy-side institutions.