French investment bank Société Générale Corporate & Investment Banking (SocGen CIB) has launched Alpha x Europe, an internal crossing engine for buy-side client order flows, in response to buy-side concerns about market fragmentation, rising trading costs, and gaming in dark pools.
“We have listened to those concerns and tried to come up with a solution,” Stephane Loiseau, managing director and deputy global head of execution services at SocGen CIB, told theTRADEnews.com.
Alpha x Europe trades shares listed on all the primary exchanges in Europe, with the exception of Spain initially. The system matches child-level orders at the mid-point of a pan-European best bid and offer, which is calculated from prices on all the trading venues SocGen accesses under its best execution policy. This includes primary exchanges and pan-European multilateral trading facilities such as Chi-X and Turquoise. According to the firm, matching at the mid-point reduces implicit trading costs by half, and it estimates the average saving is between five and 12 basis points.
The system, which contains no proprietary SocGen flow, is open to both hedge funds and traditional long-only asset managers. To prevent gaming and pinging, clients will not be able to send orders directly to Alpha x Europe. It is accessed through SocGen’s algorithms, which can either be employed by the buy-side trader directly or by a SocGen sales trader.
According to Loiseau, one of the key features of Alpha x Europe is that, unlike some broker crossing engines, orders are sent simultaneously to the crossing engine and the public markets, instead of hitting the crossing engine first and then sending any unfilled quantity on to other venues. SocGen’s algorithms dynamically monitor how much of the order has been filled in either Alpha x Europe or external markets and adjusts the orders in each once fills are achieved.
“The advantage of doing that is that you don’t have any opportunity cost as you would in a traditional dark pool, where you are resting orders,” said Loiseau. “You are not missing out on liquidity on the lit market because you are trading on the lit market at the same time, yet whenever there are opportunities on the crossing side of the equation, you are benefiting from those by saving half the spread.”
Following its launch today, SocGen intends to gradually build up trading on Alpha x Europe throughout the first half of April. Loiseau is confident that the system will achieve good crossing rates. “We have conducted a proof of concept internally and have been able to achieve crossing rates of about 10%,” he said. “It would be reasonable to achieve that in the near future in a live environment. Going above that level is going to be difficult because of the nature of this business, and I don’t think anybody really achieves anything above that level.”