As the ongoing battle for liquidity heats up among the major U.S. equity block trading platforms, BIDS Trading appears to be making rapid inroads with its open access, utility pricing model. In a sign that its model is catching on, yesterday, the BIDS alternative trading system, announced it has traded one billion shares since its formal launch this past April, only six months ago.While it's had some single-day records of 46.5 million shares, average daily volume has grown from 8.8 million shares a day in June, up to 16.9 million shares in July and was trading 10- to-12 million shares at the end of August, notes Tim Mahoney, CEO of BIDS Trading in an interview yesterday in his downtown offices.
The system was formed because the original investors - six leading broker-dealers (Citi, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley and UBS felt it was problem in trying to execute large blocks of stock in the public markets and the existing systems - i.e. Liquidnet, ITG Posit, NYFIX Millennium and Pipeline were too expensive and Liquidnet excluded the sell side.
"We're owned by 12 investment banks and the current marketplace is very expensive. We're going to become a low-cost, open flexible utility," says Mahoney in an interview in his offices yesterday. (The other six investors that entered in February 2007 are: Bank of America, Bear Stearns, Credit Suisse, Deutsche Bank, JP Morgan and Knight Capital Group ). In a report released yesterday, titled "Block Trading Platforms: BIDS Ups the Ante," Sang Lee, managing partner of Aite Group, predicted that since the launch of the consortium-led BIDS, that price compression appears almost inevitable. According to Lee's report, ITG POSIT, Liquidnet and Pipeline charge two cents per share, while BIDS is charging less than half a cent per share.
More than that, BIDS is committed to allowing both the buy and sell-sides in and treating them both fairly, says Mahoney, a former buy-side equity trader at Merrill Lynch for over 20 years. After running equity trading desk for seven years at Merrill Lynch Asset Management (now part of Blackrock), Mahoney left the firm to join the ATS last October. In an interview yesterday in BIDS' downtown offices, Mahoney explained how the original investors recruited him because he had been complaining about the various ATSs for the past two years. "I formed some very strong views on what I wanted to do," says Mahoney. "My single biggest complaint was that every ATS had their own setup, they were dictating to me their terms. I'm the one with fiduciary responsibility; I'm the one with the portfolio manager screaming at me," Mahoney explained. On the other hand, Mahoney says when he goes to any Web site, like Amazon, it lets him create your home page.
Mahoney believes the buy-side should be able to customize the ATS, so with BIDS, the trader can negotiate or use order match. "I think a network ends up looking like its constituency," he says. In line with this thinking, BIDS provides high-end tools so that traders can use firm and conditional orders and set the minimum or maximum order size. A trader could say, "Unless I trade 50,000 shares, I want to be dark, no one should see me unless they're willing to trade 50,000," he says. "The larger your minimum trade size, the fewer opportunities to trade; the smaller, the more people know you exist," says Mahoney. BIDS also tracks trading behavior so the buy-side can control with whom they get involved. For instance, someone could say they'd only show their firm order to a conditional order that converted 80 percent of the time to firm, illustrates Mahoney.
Next BIDS faces the challenge of buy-side connectivity, which will take several months of contract negotiations and coding to complete. Currently the majority of the volume is coming from the sell-side through connectivity to three leading electronic trading platforms: Morgan Stanley's Passport, Goldman Sachs' REDIPlus and JP Morgan's Neovest. "If you're a buy-side person now, BIDS is a destination on those products," says Mahoney. It's hard to break out the buy-side volume since the buy side is also coming in through algorithms that are using dark servers that search a variety of dark pools, he says.
"This is a building year. We're going to connect to everyone we can," says Mahoney. BIDS is currently working on integrating with a half a dozen providers of execution management systems and order management systems. [This morning, BIDS announced connectivity to FlexTRADER, a broker-neutral EMS from FlexTrade Systems, giving buy-side traders direct access to the ATS.] "Connecting to the sell-side was simpler and was more straight forward. The ability to connect to the buy-side is critical for our long term success," says Mahoney.
The question is once the buy-side connectivity is in place how will the BIDS offering stack up against the independent block trading alternatives that are also evolving their models. Liquidnet is expanding the buy-side only model into Asia following success in Europe and Canada; while NYFIX Millennium is seeking passive liquidity from index funds and Pipeline is developing an algorithm switching engine. "The advantage my competitors have is they've done the connectivity. The advantage we have is we think our model is new and fresh," says Mahoney, adding, "Nobody offers an open utility, flexible concept."As the battle for liquidity heats up among the major U.S. equity block trading platforms, BIDS Trading appears to be making rapid inroads with its open access, utility pricing model. In a sign that its model is catching on, yesterday, the BIDS alternative trading system, announced it has traded one billion shares since its formal launch this past April, only six months ago. 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