Tag Archives: dark pools

NYSE Snafu Causes Market Structure Experts to Flip-Flop

MarketsMuse senior editors have quickly canvassed a broad assortment of “market structure experts” and industry talking heads who have been at the forefront of debating the pros and cons of market electronification, multiple market centers and the underlying issue: “Is Market Fragmentation Good, Bad or Ugly?”

For those who might have just landed on Planet Earth, the debate (which is ongoing via industry outlets such as TabbForum, MarketsMedia, and most others) boils down to whether multiple, competing electronic exchange systems enhance overall market liquidity and make it ‘easier and better’ for institutions and retail investors to execute ‘anywhere/anytime’ via the now nearly two dozen “ECNs”, “Dark Pools” that offer a Chinese menu of rebates, kickbacks and assorted maker-taker fee schemes (e.g. ARCA, BATS etc), or whether someone should try to shove the Genie back into the bottle and revert to the days of yore when the NYSE was the dominant listing and trading center for top company shares, and complemented by a select, handful of regional stock exchanges, most notably, The MidWest Stock Exchange, The American Stock Exchange, The Philadelphia Stock and the Cincinnati Stock Exchange.

Despite the fact that CNBC talking heads dedicated the entire day’s coverage to the NYSE snafu with rampant speculation as to whether the day’s outage was due to a cyber attack by the Chinese in their effort to distract the world from the dramatic drop in China-listed shares, whether it was a Russia-based malware attack, or perhaps even an ISIS-born cyber-terrorist attack that also impacted United Airlines)–the fact of the matter (one that CNBC seemed oblivious to) is that those who wanted to execute stock trades through their brokers were able to do so without disruption, simply because those brokers routed orders to a drop down menu of exchanges that compete with the NYSE..

Yes, the NYSE lost a day’s worth of fees attached to every order they typically execute on a normal day (not a good day for exchange President Tom Farley)–but more than half of the market structure experts who have continued to campaign against market fragmentation have [temporarily] flip-flopped today and have acknowledged that were it not for multiple competing exchanges, today would have been a real headache for US stock market investors and brokers. No doubt CNBC and others who were fixated on this outage will be able to turn their attention back to what is taking place in Greece, China and other topics that actually do impact the price of global equities.

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What’s Next? Another Dark Pool: LSE Jumps In via Plato’s Retreat

MarketsMuse.com Tech Talk update profiles the latest news flash for FinTech wonks: Whilst the securities industry landscape continues to debate the “dark pool vs. lit market” topic, the London Stock Exchange (LSE) is taking a chapter from the behometh brokerdealer universe with their own scheme to introduce a dark pool, but the regulated LSE proposes to make their platform a ‘non-profit utility”. Below is courtesy of extract from Bloomberg LP reporting. MarketsMuse Editor’s note: Our MM title editor apologizes to those who might be confused by the reference to the once notorious Manhattan NY gathering place for those seeking to keep their wild side ‘dark’..but we thought it was a fun title nonetheless..
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marketsmuse members only

Interest in Buyside-Only Equity Trading Platforms Gains Traction..Again..

MarketsMuse update courtesy of extract from Pension & Investments Feb 23 edition, with story reported by Sophie Baker …MM Editor Note: The notion of buyside-only electronic trading venues for institutional equities (i.e. block trading) is not a new one. Graybeards who have been around for more than 15 minutes will say “First came Instinet, then there was Optimark….”both were spearheaded by trading pioneer Bill Lupien, and while Instinet quickly became the platform for all to trade NASDAQ stocks, Optimark was determined to be a black box for block trading available to buysiders only…and burned through nearly $100 million before it was sent to the wood chipper. Proving that history repeats itself and that innovation doesn’t need to be an original idea, as Yogi Berra would say “ Its Déjà vu All Over Again.”

The development of buy side-owned equity trading venues has attracted interest from long-term investors.

U.S.-based Luminex Analytics & Trading LLC, set to open for business this year, and Europe-based Plato Partnership Ltd. are being developed against a backdrop of increased pressure on costs, regulatory demand for best execution, recent regulatory investigations into the U.S. dark pools operated by banks, and concerns about some participants in existing dark pools.

“We manage our equity exposure largely internally, and we also do the trading internally,” said Thijs Aaten, managing director, treasury and trading, at APG Asset Management, Amsterdam, Netherlands. The firm has €400 billion ($453.3 billion) in assets under management, including the €344 billion pension fund ABP, Heerlen, Netherlands.

“I’m definitely willing to consider new venues that we can trade on. If there is an advantage to it, then it would be silly not to make use of it. It is our fiduciary duty, and if there is a new opportunity, we have to investigate.”

Luminex is a buy side-to-buy side trading venue owned by a consortium of nine money managers, representing a total of about $15 trillion under management: Fidelity Investments, BlackRock (BLK) Inc. (BLK), Bank of New York Mellon (BK) Corp. (BK), The Capital Group Cos. Inc., Invesco (IVZ) Ltd., J.P. Morgan Asset Management (JPM), MFS Investment Management, State Street Global Advisors and T. Rowe Price Group Inc.

Managers declined to disclose their financial commitments.

Plato’s consortium includes two money managers: Deutsche Asset & Wealth Management and Norges Bank Investment Management, manager of the 6.6 trillion Norwegian kroner ($870 billion) Government Pension Fund Global, Oslo. “We believe we will be naming more firms in coming months,” said Stephen McGoldrick, project director, Plato Partnership, in London.

Both venues were created to give long-only money managers and institutional investors back the power they need to fulfill their best execution requirements, and to ultimately save costs for their clients when trading large blocks of securities.

APG is keen to trade with long-term asset holders, Mr. Aaten said. “(That type of trader,) taking a fundamental but opposite view on the same company, is the cheapest to trade with. But finding that long-term trader is difficult. This is what those new, buy side-to-buy side platforms are about — helping to find those long-term asset owners, (which) will lower our trading costs.”

He said the traditional model, where the sell side acts as a go-between for buyer and seller, and high-frequency traders are admitted, is more expensive. High-frequency traders “don’t have a fundamental view on an equity, but trade on information from the order book. Because of technological advantages they have this information before I do … in our experience, they are the most expensive type of trader to trade against,” Mr. Aaten said.

Self-sustaining

“The consortium’s goal is that Luminex will become self-sustaining, offering its clients a low-cost, fully transparent trading venue for large peer-to-peer block orders, preserving as much alpha as possible for the trading partners’ clients,” said Jeff Estella, director, global equity trading at MFS in Boston.

A BlackRock (BLK) spokesman said company officials believe “alternative trading platforms are invaluable execution tools for investors seeking to avoid information leakage and reduce market impact,” and a spokesman for Fidelity said Luminex “will be focused on helping the investment management community more efficiently source block liquidity.”

Excess cash flow will be reinvested in Luminex, rather than making a profit for the consortium.

Being designed as non-profit-making entities for the members of the consortiums is a key point in the platforms’ favor, said sources.

Plato’s consortium members have goals similar to those for Luminex.

“The consortium’s key aims for this project are to reduce trading costs, simplify market structure and to act as a champion for end investors — a vision which we firmly back,” said Oyvind Schanke, Oslo-based chief investment officer, asset strategies, at NBIM.

Buy side and sell side Plato participants will have equal say on key decisions, and the model was developed with an eye on European regulation, said Mr. McGoldrick.

The intention is to open Luminex to other long-only managers, but there are requirements. This new platform will require a commitment from users of a minimum block size of 5,000 shares or a value of $100,000, whichever is smaller, said a spokesman for Luminex.

Execution guaranteed

Should an order be matched, it is guaranteed to execute. Users also can increase the size of their block trade. Hedge funds that abide by the same rules are permitted on the platform, but not high-frequency traders.

Still, liquidity and the likelihood of finding a match are two issues that hang over the success of Luminex and other buy side-to-buy side platforms.

To continue reading the full story from P&I, please click here.

trilogy

Dark Pool Tales Part 3: Fidelity Leads Buy Side-Only Initiative For Block Equities

In what has become an ongoing “trilogy-type” story straight out of Hollywood, the WSJ reports today that Fidelity Investments is set to launch yet the latest “dark pool” initiative via a consortium of and exclusively for buy-side investment managers. The announcement comes on the heels of a recently-profiled NYSE initiative [with a strategy to partner with leading investment banks that operate their own dark pools and otherwise bring back the block trade volume taking place away from the NYSE in consideration for lower fees] and a competing NASDAQ initiative that comes with a completely different pricing scheme in effort to capture market share.

MarketsMuse Senior Editor quips: “We’ve seen ‘buy-side only’ schemes before for both equities and fixed income. Bottom line: they’ve all wound up on the cutting room floor.”

Here’s the extract from WSJ reporting, courtesy of Kirsten Grind: Continue reading

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NASDAQ Challenges the NYSE to Run Dark Pools

MarketMuse update courtesy of Reuters in CNBC

The NYSE has recently come close to completing a deal with some big banks to take over running the banks’ dark pools. Now, NASDAQ is proposing an alternative solution as they eye running dark pools for banks as well.

Nasdaq OMX Group has approached several big banks with a proposal to take over the operation of their so-called “dark pools,” and plans to seek regulatory permission to do so, The Wall Street Journal reported, citing Nasdaq Chief Executive Robert Greifeld.

The new initiative was a response to the needs of the company’s customers and not a strategic change, the Journal quoted Greifeld as saying.

Exchanges have been losing market share to broker-run alternative trading systems, including “dark pools,” partly as brokers seek to avoid high exchange fees.

Dark pools are broker-run electronic trading venues, and several big banks have one. They allow investors to trade anonymously and only make trading data available after a trade, reducing the chance that others in the market will know about the buyer’s or seller’s intentions and move the price against them.

Dark pool venues have come under scrutiny amid concerns their unlit markets may drive too much volume away from traditional exchanges and make it hard for investors to see demand and potentially distorting prices.

Last month, Citigroup said it would shut down its alternative stock trading venue LavaFlow, at a time when regulatory scrutiny has increased around broker-run trading platforms, forcing banks to rethink the costs. Wells Fargo shut its dark pool in October, citing a lack of customer demand.

Banks’ “costs are skyrocketing and our job is figuring out how we can help them solve that problem,” Greifeld told the Journal.

Using its technology, surveillance software and regulatory expertise, Nasdaq can manage dark pools on behalf of banks, still allowing them to trade at lower prices than they do on exchanges and letting bank customers trade anonymously, the newspaper reported.

A final business product hasn’t been completed and plans may change, the Journal said.

Representatives at the Nasdaq were not immediately available for comment outside regular U.S. business hours.

The U.S. Securities and Exchange Commission Chair Mary Jo White announced last year that she planned to propose new rules that would require alternative trading platform operators to disclose more details to the public about the way they operate.

For the original article, click here.

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Dark Trading Pools: Deconstructing Market Structure?

MarketMuse update courtesy of Anna Bernasek 9 January article in The New York Times.

JUDGING solely by the name, stock trading in so-called dark pools may conjure up images of mysterious deals cut beyond public view. Also called simply “dark trading,” it happens when computers serve as matchmakers and bid-and-ask quotations aren’t displayed to all participants. What’s surprising is just how big the dark-trading market has become.

trading in dark 1In the third quarter of 2014, the average daily volume of dark shares was 2.56 billion, accounting for 45 percent of the total average daily share volume in the United States, according to a report from the TABB Group, a financial research and advisory firm. That is up from 42 percent during the same period in 2013, according to the report.

What’s behind the growth? “The proliferation of dark volume is partly because of technological advancement and the creation of multiple trading venues,” said Sayena Mostowfi, senior analyst for equities at the TABB Group and author of the report. “The thinking is if you have the match internally, why would you go to the exchange?”

Assessing the overall impact of dark trading isn’t simple. Connecting computers with other computers might simply seem to be the height of efficiency, and no doubt it has some advantages. But while dark trading can benefit some insiders, it may cost the market as a whole.

For one thing, dark trading has led to greater fragmentation of the domestic stock market, which is now made up of around 300 venues. Only 13 of these are registered exchanges, while the rest are alternative trading systems or broker-dealer platforms, according to a recent paper by Frank Hatheway, chief economist for Nasdaq; Amy Kwan, now a lecturer in finance at the University of Sydney Business School in Australia; and Hui Zheng, a senior lecturer at the same school. This fragmentation has made it more difficult for many traders to find the best prices.

The paper concluded that, on balance, dark trading turns out to raise aggregate transaction costs and reduce the accuracy of prices displayed in traditional trading venues. The paper’s findings would seem to suggest that the more dark trading grows, the less meaningful public stock quotes are. And that possibility is something that all investors should be concerned about.

For the original article from The New York Times, click here

 

nyse ice ceo jeff sprecher

The Man Who Is Transforming Equities Market Structure: Dark Pool Killer Targets Maker-Taker

For those who might have missed it, Jeffrey Sprecher (pictured above), the CEO of Intercontinental Exchange, which owns the NYSE, is determined to put the genie back in the bottle by turning back the market structure changes that have taken place over the past 10 years, including the surge of “dark pools” hosted by leading investment banks which internalized all institutional order flow and the dominant use of complex “maker-taker” fee models that exchanges have provided as a means of capturing order flow to their venues.

genie-bottle-blue-smokeAs reported by the WSJ  2 days ago, Sprecher has been negotiating with all of the major banks that operate dark pools and offering a %90 reduction on NYSE exchange fees if those banks will send the order flow back to the NYSE. According to the latest news, those banks are apparently on-board with the notion proposed by Sprecher, yet KCG, the group formed by Getco and the former Knight Capital, a major “market-maker” is opposed.

Here’s an excerpt from the story by WSJ’s Bradley Hope and Scott Patterson:

“..Under the proposal, the NYSE would drop the fee for trading stocks at its exchanges to five cents per 100 shares from 30 cents per 100 shares, the people say. Banks, in turn, would accept a rule known as “trade at” that would give more precedence to the stock exchanges for most orders. A trade-at rule would mandate that stock trades take place on exchanges unless private venues offered a better price. Advocates of the rule say it would force a significant chunk of the stock trades that occur away from exchanges back onto them.

Credit Suisse AG, which operates the largest dark pool in the world, has endorsed the proposal, according to a person familiar with the matter.

Goldman Sachs Group Inc., Morgan Stanley, Deutsche Bank AG, J.P. Morgan Chase & Co., and UBS AG—which are among firms expected to be affected by the proposal—declined to comment.

“We’re actively involved in discussions with ICE and we are optimistic about the proposal yielding positive results,” said Jamie Selway, a managing director at Investment Technology Group Inc., a brokerage that operates a dark pool.

Last month, Nasdaq announced it was drafting a pilot program that would test the effect of lowering trading fees on a group of stocks. The pilot is scheduled to begin in February.

The NYSE proposal would require approval by the Securities and Exchange Commission and is likely to face opposition. Among the critics is KCG Holdings Inc., a brokerage firm that operates dark pools and a business that matches up retail stock trades.

“Mandating trading on exchanges is an elephant-gun approach motivated by commercial interests of a handful of market participants,” KCG said in a statement Wednesday.

The ICE proposal has been in the works for more than a year, according to people familiar with the situation.

Mr. Sprecher and Thomas Farley , the ICE executive appointed as president of NYSE Group, began discussing a variety of changes to their markets, including a reduction in fees, with Wall Street firms about nine months ago, according to a person close to the discussions. The goal was to try to get long-term investors such as mutual funds, as well as banks and high-frequency traders, to unite behind a broad restructuring of the market that included lower fees, the person said. Credit Suisse became more deeply involved in the discussions several months ago, the person said.”

 

The full WSJ story is here

 

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Dark Pool IEX Seeks To Transform to Major Exchange; Solicits Investors With $200 Million Valuation

Extract below courtesy of WSJ Weekend Edition (May24-25) and reporters Bradley Hope, Telis  Demos and Scott Patterson

IEX Group Inc., an upstart trading venue that aspires to be a haven from high-frequency trading, wants to become the only stock exchange that isn’t dominated by speedy dealers.

The firm is in talks with potential investors to raise millions of dollars to expand its operations and pay for the increased regulatory costs of becoming a full-fledged exchange, according to people familiar with the talks. At present, IEX is a “dark pool,” a lightly regulated, private trading venue.

IEX has previously gained the backing of a number of big investment firms, such as Los Angeles-based Capital Group Cos., which manages American Funds, and has shunned investments from Wall Street banks.

The latest fundraising talks, held at IEX’s New York headquarters, have involved hedge funds, private-equity groups and asset managers, according to people familiar with the talks.

An exchange owned solely by investment firms would be a “game changer,” said Albert Kyle, a professor of finance at the University of Maryland who has advised the government on market issues. “The motives of the exchange would be different than what we have now, and that could have benefits for investors,” he said.   For the full WSJ story, please click here

Fragmentation Harming Market Quality, Warn Traders

Courtesy of MarketsMedia

With new trading venues catering to institutional investors ready to enter the fray, market participants say that more fragmentation is not necessarily the solution to cure market imbalances.

‘Fragmentation of the markets is not a good thing for long-term investors,” Manoj Narang, chief executive and founder of Tradeworx, a hedge fund and technology firm, told Markets Media. “Regulators need to look at ways to defragment the market. The more different venues there are, the more traders who are technologically sophisticated are at an advantage.”

Narang asserts that market fragmentation hurts, rather than helps, longer term investors because the technology utilized by institutions is not as sophisticated and advanced as those used by high-frequency trading firms. They are less able to effectively wade through the plethora of lit and dark venues in the markets.

“Having more trading venues just complicates matters,” Dennis Dick, a proprietary trader with Bright Trading, a prop trading firm, told Markets Media. “We keep adding more and more layers, adding exchanges and adding dark pools, to try to find a solution, but really the solution is to break it down and start simplifying it all.”

Noted John Houlahan, Chief Operating Officer of OMEX  Systems, a broker-neutral order routing and risk management platform that provides direct market access to major equities and options exchanges as well as so-called “dark pools” for broker dealers and buyside firms, “We seem to spend as much time adding routes to new exchanges and ECNs as we do building order and risk management applications. I’ve been in this business for 20 years, and I find myself scratching my head when discovering yet another new “liquidity center”, but with a different ‘spin’ compared to already-existing exchanges.

There are currently 13 equities exchanges in the U.S., along with nine options exchanges. Many of the exchanges are operated under the same corporate umbrella, with NYSE Euronext and Nasdaq OMX each operating three equities markets and two options markets apiece. This is an addition to the 40-50 dark pools operated by independent firms and broker-dealers.

“Do we really need 13 exchanges and 50 dark pools and 200 internalizing broker-dealers,” said Dick. “I know the Securities and Exchange Commission had good intentions with Reg NMS but now we’ve gone too far the other way. We need to start simplifying. The solution is not to add more dark pools.” Continue reading