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March 1, 2004

Millennium Parties With Arca

By Peter Chapman

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The beleaguered Millennium crossing system may get a shot in the arm under a deal that allows it to expose its orders on the Archipelago Exchange. The deal, signed with Archipelago by NYFIX, Millennium's owner, breaks new ground. Since its launch nearly four years ago, NYFIX has operated Millennium as a closed system. That meant orders sitting in Millennium interacted only with other orders in the system. Millennium's quotes were not visible to the broader market.

"This is a big deal," said Bob Gasser, chief executive of NYFIX Millennium. "It gives you the ability to rest inside Millennium anonymously in the dark and to display in Archipelago anonymously to interact with the national market system. We're giving you a twofer."

NYFIX, a vendor and broker dealer best known for its connectivity services to the floor of the New York Stock Exchange, launched Millennium in 2000. The alternative trading system is a joint venture between NYFIX and a group of bulge bracket shops - customers of NYFIX's traditional routing service.

Millennium attempts to execute crosses of two types of orders: those passing through the system en route to the New York and those placed in Millennium for extended periods of time. About 80 firms use the system, according to Gasser.

The arrangement with Archipelago affects "pegged" orders only. These are orders residing in Millennium with prices that track the best price on the New York Stock Exchange. If the New York price changes, so does the quote in Millennium. NYFIX has offered pegged orders since its inception. Archipelago started offering them last year.

The bet is that desks utilizing smart routers and algorithms will preference the faster ArcaEx over the New York when seeking to hit or take the market's best prices. So far, the new functionality is being used by a handful of big players, sources say.

Under the new arrangement, a portion of a trader's pegged order -say 10 percent or 20 percent - will now post on ArcaEx. If an execution occurs on the electronic stock exchange, the quote is replenished from the balance residing in Millennium.

NYFIX has dubbed the new order a "shadow" order. While the body of the order resides in Millennium, its shadow posts on ArcaEx. In offering traders the ability to participate in the national market while also sitting in a closed network, NYFIX is betting orders will reside longer within Millennium. If the trader is getting executions on at least part of his order on the outside, he is less likely to pull the order from Millennium.

More orders sitting in Millennium for longer periods of time will result in more executions, NYFIX execs maintain. That, in turn, should attract more order flow.

Gasser holds Millennium's opacity is both its greatest asset and its greatest liability. It's an asset because it offers traders complete anonymity, but a liability because it precludes advertising. Traders suffer because no one knows they are in Millennium and because they risk missing the action in the broader market.