Turquoise sets sights on new block trading functionality

Turquoise is looking at introducing a new dark block trading service in preparation for incoming MiFID II rules.

Turquoise is looking at introducing a new dark block trading service in preparation for incoming MiFID II rules.

The pan-European multilateral trading facility (MTF) is currently working on developing block trading functionality with members and buy-side firms, with tentative plans to launch this year.  

James Baugh, head of pan-European sales and marketing at the London Stock Exchange, which owns a majority stake in Turquoise, told theTRADEnews.com the service will help market participants trade in size under MiFID II requirements, expected to come into force at the beginning of 2017.

According to Baugh, the block trading capability would take advantage of the existing Turquoise Uncross service, which features size priority and random auctioning.

“People want to trade in larger blocks and if there is a functionality that allows them to interact with like-minded passive, patient flow, that’s what they would rather target,” Baugh said.

Next month, the European Parliament is expected to vote through rules that limit the amount of trading that can be done in dark MTFs under MiFID II, placing limits of 4% on the amount of trading in an individual stock in individual dark pools and 8% across the European market. However, the rules do not impact trades executed using the existing large-in-scale pre-trade transparency waiver, which permits trades above a certain size to be executed off-exchange.

Block discovery

Under the new block trading model, currently named Block Discovery, a counterparty will send a block indication, or a parent order, to find a match. The block indication allows counterparties to place an order without locking it in until they have a match, so members can also send smaller orders to other dark pools and recall them if necessary.

When the Block Discovery service finds a match for the large order, it will send an order submission request to both sides of the trade. 

“It’s inferred that when an order is firmed up, it will at least be matched by the initiating member’s minimum execution size,” Baugh said. Once the match is agreed, both counterparties will then send a passive order to Turquoise Uncross for final matching. 

Baugh said members would then be able to benefit from the randomised auctions of Uncross, which occurs between five and 45 seconds, preventing orders from interacting with more time-sensitive flow.

Turquoise isn’t the only company to reveal plans of a block trading service recently. Last week theTRADEnews.com reported the Bank of America Merrill Lynch is also consulting with European clients on the possible introduction of a new block crossing capability.

Baugh said there has been increased support for Uncross, with the average daily value traded increase from €13.5 million in June 2013 to €82.5 million in March 2014.

As for when the new service will launch, Baugh said Turquoise will move as quickly as the market will allow. “We will not launch this functionality unless we have the support to do so.”