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September 30, 2002

An ATS Befriends the Big Board

By Peter Chapman

Also in this article

Accepting Orders From Floor Traders and the Buyside

A new alternative trading system is arising from an unlikely place: the floor of the New York Stock Exchange. A prominent independent floor broker, Richard A. Rosenblatt & Co., and the largest specialist at the Big Board, LaBranche & Co., are backing a POSIT-like ATS that will route its matches to the floor of the Big Board for execution. And it is set to debut early next year.

The system, called Linx, is a continuous blind crossing mechanism that will match blocks, price them, and then route them to a floor broker who will attempt to cross them at the post. The ATS will solicit orders not only from the buyside, but, for the first time, from traders on the floor as well.

Linx is the first ATS to cooperate rather than compete with the New York Stock Exchange.

Success Rate

Most systems such as POSIT, NYFIX Millennium, Liquidnet, OptiMark and others have attempted to draw order flow away from the exchange. The overall success is mixed. In the case of OptiMark it was a disaster.

Richard Rosenblatt founded Linx in 1999. He recognized that both ATSs and the Big Board had something to offer, but both had their flaws. ATSs provided frictionless trades, but little liquidity. The New York had all the liquidity, but news of large trades often leaked, adversely affecting price.

The broker, who services buyside traders almost exclusively, envisioned Linx as a bridge between the hermetically sealed world of the ATS and the gossipy Big Board. Rather than force the buyside to choose between the two models, Rosenblatt hoped to incorporate the best features of both in one package.

Traders would get both liquidity and zero market impact. The two didn't have to be mutually exclusive. Rosenblatt secured his first capital infusion from the former specialist firm Robb Peck McCooey. Then, in November 2000, LaBranche kicked in some dollars. LaBranche subsequently acquired Robb Peck, leaving it and Rosenblatt as the two principal backers of Linx.

In December 2000, Rosenblatt tapped Josh Rose, a 15-year veteran of Jefferies and ITG, to run Linx.

"We see a real opportunity in the listed world to build ATS functionality and attach it to the New York Stock Exchange," Rose said. "This is a product that combines the benefits of the primary market with those of electronic trading."

Rose knows a thing or two about pitting an ATS against the Big Board. He was one of three creators of POSIT, the blind crossing system built at Jefferies & Co. and carried forward by spin-off ITG. Although it is the largest ATS used for trading listed securities, POSIT has never seriously challenged the Big Board's dominance.

Blind' System

It's no coincidence that Rosenblatt picked a former POSIT exec to run his new venture. Although POSIT runs matches periodically throughout the day and Linx does so continuously, the two are similar.

They are both "blind," meaning traders' quoted interest is not publicly disclosed. And they are both "volume-discovery" mechanisms that leave the price discovery to the New York Stock Exchange.