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September 30, 2002

An ATS Befriends the Big Board

By Peter Chapman

In general, Linx picks up where POSIT leaves off. Traders post non-priced orders. If a match occurs, the trade is priced at the midpoint between the best bid and offer at the New York. With POSIT, that's the end of the story. An execution has taken place.

On Linx, it's just the beginning. If two orders match on Linx, they are routed to a Richard A. Rosenblatt floor broker. The broker then exposes both orders to the crowd at the post. At that point, one of two things occurs. If no competing buyer or seller emerges from the crowd, the broker crosses the orders clean - in their entirety - at the BBO midpoint.

If a competing interest does emerge to better the proposed price, the buyer may be forced to pay more or the seller to accept less. Linx and its floor brokers have discretion to trade the stock as they see fit. In addition, the buyer, the seller or both may receive only a partial fill.

The everyday risk of a break-up of the order is in no way diminished by the Linx process. In other words, the treatment of the order at the post is no different than that of any other two-sided order. That may be a price the buyside is willing to pay.

Right now, a trader can tap into Big Board liquidity via an upstairs desk. But if news of the trade is leaked to the Street, the price could move adversely. That's called market impact. To avoid market impact a trader can use a blind ATS. ATSs, however, have low fill rates. The odds are great that the trader will get nothing done.

The fill rates of most blind ATSs are no more than 20 percent. POSIT is the most successful of the group, but still only trades about 30 million shares per day. The New York Stock Exchange averages about 1.2 billion shares daily. Rose believes Linx has a shot at higher fill rates than its peers. Because its backers are both influential floor members and big traders they will be able to convince other floor traders to post their orders in Linx.

Liquidity will then beget liquidity. Rosenblatt has been on the floor for 30 years and co-founded the Organization of Independent Floor Brokers. Robert Murphy, the former ceo of Robb Peck, is now vice chairman of the NYSE. Michael LaBranche is head of the largest specialist firm. LaBranche itself trades about 140 million shares as principal per day. So much clout and so much order flow are bound to lead to high match rates, says Rose. Because an order placed in Linx comes back to the floor for execution Big Board traders will not fret that they are cannibalizing their business when they post an order, the exec notes.

Frictionless Liquidity

"By building a system that ends up executing on the New York, we are in a very unique position," Rose said. "We think we are the first trading system that has a reasonable chance to attract upstream order flow from the floor itself."