NYSE Euronext said it plans to form a joint venture with a dozen Wall Street firms that own BIDS Trading, an alternative trading system (ATS), to help re-aggregate block liquidity.NYSE Euronext will have a 50 percent stake in the joint venture, which will operate as a facility of the NYSE and be subject to regulatory oversight by NYSE Regulation. In addition, NYSE Euronext will make an undisclosed investment in BIDS Holdings, the parent company of the ATS, whose investors include Goldman Sachs, Lehman Brothers and Morgan Stanley. The owners of BIDS account for half of all NYSE listed stock trading volume.
"In era of circuitous routes to U.S. stock liquidity, where access for institutions looks more like a very cool video game, the NYSE has decided to partner with the broker consortia BIDS Holdings to build a stock block facility," commented Brad Bailey, senior analyst at Aite Group. "This is putting the NYSE into an ownership role to capture some of the liquidity that's migrating from the exchange to the dark venues," says Bailey in the interview.
This is the second venture related to block trading that NYSE Euronext has announced in a week. Last week, the transatlantic exchange operator announced Project SmartPool, a joint venture with BNP Paribas and HSBC to develop a Pan European electronic block trading platform that would operate as a multilateral trading facility under MiFID, which takes effect this week. "Certainly, Euornext is taking leadership in early days of MiFID to come up with some type of consortia MTF venue," says Bailey in an interview.
But the move with BIDS is a significant step toward the NYSE going dark and reclaiming the large block orders - 10,000 shares or more - that are being sliced and diced through algorithms and executed as 300 share orders via the exchange's electronic platforms or through ECNs and dark pools.
The question is will the exchange-operated facility with brokers in the middle be able to attract the institutional order flow that has gravitated to Liquidnet, Investment Technology Group's Posit and Pipeline Trading Systems?
"There are a multitude of (dark pool) systems operated by brokers, but the block liquidity from institutions still resides in three specific venues," notes an industry source. So far exchanges have not been able to pull the institutional order flow away from these three venues, says the source. According to Aite Group, block-trading venues that had 1 percent market share in U.S. equity volume in 2003 have grown to 4.5 percent in Q2 of 2007, while dark pools bring that figure up to 15 percent.
Last year a consortium of broker-dealers formed BIDS Trading because the dealers were having a hard time executing large blocks in the public markets and because the existing alternatives were too expensive or in the case of Liquidnet, excluded the sell side. BIDS executed one billion shares within six months of operating. But the source says the order size is around 500 shares. The source also questions why brokers that own their own dark pools, would want to post liquidity in blocks to this joint venture.
Even though the brokers own their own dark pools, "I think they want to work together," says Bailey. " If you look at Pipeline and Liquidnet, their (trade sizes) are in the tens of thousands (of shares." If they could develop more sizeable liquidity, it would be more interesting," says the analyst. Based on feedback from institutions, Bailey adds, "I do get the sense that people would be interested if there was venue like this,"NYSE Euronext plans to form a joint venture with a dozen Wall Street firms that own BIDS Trading, an alternative trading system in a move to re-aggregate block liquidity. 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