Citing the problem of fragmentation in U.S. equities,Thomson Reuters today announced the launch of a new block trading service to help brokers discover liquidity for their buy-side clients.
Built upon the company’s AutEx and AutEx Trade route products, the block-trading service is tapping into the community of 750 buy-side firms who have access to over 700 executing brokers to find counterparties to their block orders. “We had this deep network out there with all sorts of latent block liquidity,” said Hegarty.
Today, these 700 sell side firms are sending indications of interest (IOIs) — prices for which they will buy or sell equities – over the AutEx network to 750 buy-side institutions. After the orders are executed, the sell side advertises the trades via AutEx as well.
Now Thomson Reuters is attempting to leverage that community and connectivity to turn those IOIs into transactions. “We’re allowing them to take those capabilities to actually execute on the block trades,” said Hegarty. “Our clients have been asking us to take it (AutEx) to the next level,” said Hegarty.
Finding Block Liquidity – A Persistent Problem
Over the past few years, fragmentation, shrinking volumes, coupled with the decline in trade size from algorithmic trading have made it more difficult for the buy side to execute blocks. A number of existing block trading systems in U.S. equities are focused on the block-trading problem. Thomson Reuters is moving onto the turf of existing block trading ATSs like Liquidnet, ITG’s POSIT, and BIDS Trading. In addition, many brokers have their own block-trading systems. In 2012, State Street acquired Pulse Trading, an agency broker that offered block trading and blotter sweeping technology. In June, Reuters reported that Goldman Sachs is offering a tool to top clients that attempts to automate block trading that ties into a broader platform known as Marquee. Prices are set by the bank’s inventory and market conditions, according to Reuters.
But, Hegarty points out that some of the ATSs and crossing networks exclude the sell side, and also that Thomson Reuters is not a broker-dealer so it doesn’t have a proprietary trading desk which leads to information leakage.
In particular, Hegarty cites three advantages of Block Connect that will appeal to the sell side and distinguish it from ATSs. First, since the sell-side are clients of AutEx’s IOI network and they also use the advertised trade capability, executing blocks on AutEx can lead to increased efficiency and productivity, he said. Second, it can help the sell side, including mid-tier-brokers, to strengthen their buy-side relationships by helping them get block liquidity. Third, with pressures on commissions, block trading is one of the more profitable services the brokers can offer. “This allows them to do high-touch commissions with the buy side,” said Hegarty, noting this is not program trading or algo trading which translate into low-touch commission rates.
Meanwhile, the buy side can get access to natural block liquidity, said Hegarty. This happens when a broker posts an IOI and a buy side firm clicks on it, which then turns it into a firm order. “They’re getting the natural other side of the trade, which is a big deal for the buy-side,” he said. Since the sell-side is not able to commit capital like they were five years ago, it’s more important for them to access the other side of the trade, he added.
To fit into the buy-side’s workflow, Block Connect has been integrated into the industry’s leading sell side and buy-side OMS and EMS providers, including Eze Castle Group, Fidessa, FlexTrade and Linedata. “It’s something that the buy side sees as a critical piece to be integrated with their workflow,” he said.
Another advantage for the buy side is that Block Connect minimizes information leakage, said Hegarty. “Because we’re only matching natural other sides of the trade, the information leakage is minimized,” he said. “All we are doing is taking the natural liquidity available on Autex, and allowing our clients to take action on it. So it’s always been natural liquidity that’s in there, which is actually going to strengthen the value of the IOIs that are going across Autex,” he said.
Preserving anonymity is another aspect since Thomson Reuters is not a broker and doesn’t have a big prop-trading desk. “We’re not going to be taking any of these orders and shipping them out across Wall Street. They get done in Block Connect or don’t get done,” said Hegarty. In fact, Thomson Reuters is using a separate broker-dealer to print, clear and settle the trades. It also handles the Order Audit Trail System (OATS) reporting to FINRA for the buy side.
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“Because we are doing the OATS reporting, it keeps the buy side anonymous to the sell side until the trade is actually executed,” he explained. This means the buy-side is kept anonymous until after the trade is done, but the buy side can contact the counterparty post-trade, said Hegarty said. Asked what will be the biggest difference between Block Connect and ATSs, Hegarty said it will the ability for the buy side to contact the counterparty post-trade. “That is not something that any of the ATSs or crossing networks have available,” he said.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio