On Monday, NYFIX Millennium and the Archipelago Exchange (ArcaEx) launched new order-management functionality that gives buy and sell-side traders the ability to represent their orders for listed stocks in both Millennium and ArcaEx simultaneously.
Under the so-called Millennium Shadow Order, the user enters a pegged order into NYFIX Millennium, an alternative-trading system. A pegged order tracks the New York Stock Exchange specialist's national best bid or offer and changes every time the price moves.
The trader then designates that a portion of the order be sent to ArcaEx where it will be displayed in the National Market System (NMS). Meanwhile, the remainder of the order sits inside Millennium waiting for execution.
This lets Millennium display a public quote through ArcaEx anonymously in the NMS so that it can compete on equal footing with other market centers, including the NYSE specialist quote, according to NYFIX's announcement.
"New York's (market) share is under pressure and as a result our clients are under pressure to source two liquidity pools in the marketplace," says Robert Gasser, Chief Executive Officer of NYFIX Millennium, which is part of the broker/dealer operations of NYFIX Inc., based in Stamford, Conn. "This is a very efficient way to source two liquidity pools in the listed market," adds Gasser.
It's also a sign that electronic execution-venues are stepping up the pressure on the NYSE, whose market share slipped to 75.5 percent in January, though it recovered to 77.2 percent in February.
According to Gasser, buy-side traders are asking their sell-side traders if they exclusively operate on the NYSE. And if they do, many buy-side traders have a problem with it. Because buy-side traders are seeing liquidity move away from the primary market, they're telling their brokers, "If you're not going to find it, I'll find someone else," contends Gasser. "It's a very profound market change," adds the CEO.
Here's how the Shadow Order works: If a trader has a buy order for 50,000 shares of IBM, he or she can designate that 10 percent or 5,000 shares to be routed to ArcaEx, and that the order will peg the NYSE bid.
"You will be on the bid at all times, so every time the bid changes, your bid changes," says Gasser. Of the 5,000 shares routed to ArcaEx, only 500 shares will be shown in the quote, while 4,500 shares will be hidden in ArcaEx's reserve book. As orders are executed in the NMS through ArcaEx, the quantity is replenished from what is sitting in Millennium. If the order is executed in Millennium, then no more stock is sent to ArcaEx. One sell-side broker says this is a step forward for NYFIX. "They're main functionality is a totally passive order book," says Jamie Selway, managing director of Whitecap Trading. With the Shadow Order it takes Millennium from a system where they don't show anything, to show a displayed component. Exposing orders to the light of day is a critical component to attracting the other side," says Selway.
But the pegged-order functionality is not unique to Millennium and ArcEx. About a month ago, Instinet's value-added broker went live with Continuous Block Crossing (CBX) system, an anonymous block-trade matching system that can represent portions of the order in different electronic communications networks, such as ArcaEx and INET, as well as routing to the NYSE.
"The notion is similar to CBX, that exposure to multiple ATSs is something that is meaningful," says Selway. One key difference is that sell-side traders can use Shadow whereas Instinet's CB X is restricted to the buy side. While Millennium and ArcaEx are focusing on listed stocks, CBX is for both Nasdaq and listed stocks.
Will Selway use the Shadow Order? Selway says he already has the tool to get to each ECN, though this automates it more. "So to the extent it saves labor, we may use it," he says. "This thing isn't solving a problem for us. We have access to everything."
Given that NYFIX's strength is clients that are listed block-traders, who still don't have access to INET or Arca, Selway thinks the tool will be useful to them. "Rather than establish another linkage, they can use the NYFIX linkage to get to another place. It's potentially a strong tool for that," he says. 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