NYSE MatchPoint Offers Free Internalization to Sell-Side DMA Providers

NYSE MatchPoint is talking to several of the largest broker dealer members of the exchange about connecting their direct market access (DMA) trading systems up to the new portfolio-based crossing system."It's almost a crossing network plugged into the back of their DMA," says Jim Ross, VP, NYSE MatchPoint in an interview with Advanced Trading. The new strategy is intended to pull in order flow from the largest broker dealers and allow them to internalize and cross flows via MatchPoint's technology.

Many of the large brokers, Merrill Lynch, Citi, Lehman and Deutsche Bank, provide DMA trading systems to institutions that are index fund managers and trade huge baskets or lists of stocks. These firms are looking at providing NYSE MatchPoint to their customers as well, says Ross.

"In a way we're giving them a matching facility for free," says Ross explaining that DMA order flow providers could use NYSE MatchPoint to internally match customer orders at no charge. While the exchange won't earn any revenues from the internalization piece Ross says,"It enables us on the exchange front end to aggregate the liquidity and have it reported at the exchange."

The new DMA proposal is intended to boost the order flow entering NYSE MatchPoint, which is being launched as a facility of the exchange to complement the continuous marketplace. The brokers could internalize the customer flows coming into their DMA systems and use MatchPoint to internally cross those flows, says Ross. Those orders will interact with others to the broker's benefit, he says. The first layer is that brokers would use the MatchPoint technology to find the matches. Then it interacts with the residuals and with everyone else, says Ross.

"The exchange has immense breadth of technology services and capabilities to enable us to extend this scale to the brokers. This is a value to the member firms," says Ross. "The idea here is our technology is scalable to enable us to extend the internalization process which many are already doing but at great expense," says Ross.

Though the NYSE has opposed internalization in the past because it takes order flow away from the price discovery process, brokers are using their own internalization engines or dark pools to match trades away from the exchange. "We want to repatriate liquidity back to the exchange and we want to centralize that where it makes sense," says Ross.

This move falls on the heels of NYSE MatchPoint developing connectivity to leading OMS and EMS providers - FlexTrade, Portware, Fidessa LatentZero and Mixit, an OMS that is used by a lot of floor brokers. Large sell-side firms that run program trading desks, transition desks, proprietary desks or internal quant desks use systems like FlexTrade and Portware to trade baskets and do index arbitrage. Ross says Fidessa, which serves both buy and sell-side firms, has approached customers that are upstairs firms and floor brokers that want access to NYSE MatchPoint via the Fidessa to send in their portfolio-based trades.

Right now, NYSE MatchPoint is focusing on authorization and testing. "We're working with the OMS vendors and the membership-based list providers and they are huge players," says Ross, who maintains the list-based trader represents billions of dollars of liquidity that is not currently being served.

Because the portfolio based trading environment is new to the exchange, there are a number of regulatory and rule approvals it had to obtain as well as undergo vigorous review for surveillance, capacity planning and throughput. For instance, NYSE has never traded portfolios or non-listed securities before, whereas NYSE MatchPoint will cover all NMS securities, including Nasdaq and Amex-listed stocks. "This has got to be methodical," says Ross, who adds, "Remember this is the New York Stock Exchange, We're not running this out of a garage."

NYSE MatchPoint received approval for its rules from the Securities and Exchange Commission on Jan. 7th for intraday and after hours crosses. On Jan. 22, the platform went into production for after hours trading at 4:45 p.m. The current focus is on authorization and testing. Currently there are 50 brokers signed up and Ross would like to reach 150 as critical mass. In the next six-to-eight weeks, NYSE MatchPoint plans to roll out the intraday cross, probably at 11:00 a.m."In a way we're giving them a matching facility for free," says Jim Ross, VP, NYSE MatchPoint, explaining that DMA order flow providers could use NYSE MatchPoint to internally match customer orders at no charge. 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