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February 2, 2006

NYFIX's Natural Way of Finding Liquidity

By Michael Scotti

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  • NYFIX's Natural Way of Finding Liquidity

The words "natural liquidity" are music to the ears of a buyside trader. So it's probably not difficult to understand why NYFIX named its new indication of interest product, "Natural."

"It's more than an indication of interest," said Robert Gasser, NYFIX's new chief executive. "The buyside can execute right on the wire at the midpoint." Natural, launched last summer, works in conjunction with NYFIX Millennium, a so-called "dark pool" that allows equity orders to sit unexposed to the public market. Orders visit these alternative-trading systems in hopes of finding a match, typically before making their way to other destinations such as exchanges or ECNs. When there is a contra-side residing in the dark pool, an execution occurs.

NYFIX's goal with Natural is to give the buyside an opportunity to send each other indications, which could lead to block trades in Millennium.

Beginnings

Behind NYFIX's decision to launch Natural was dissatisfaction by the buyside over the quality of the indications from upstairs' desks, according to Gasser. One NYFIX client suggested the buyside ought to send indications to each other, and the concept of Natural was born, according to Gasser. "What we did was marry the network," he said.

At the same time, the buyside is still able to trade in smaller increments while their orders stay in Millennium where the average execution size is about 1,200 shares. About 25 percent of the executions in Millennium stem from the bite-sized algorithmic orders passing through the system, Gasser said. Orders that rest in Millennium are called "conditional" and can interact with other conditional orders in the system or against orders that pass through Millennium.

"All the dark pools are trying to build critical mass," said NYFIX exec Brian Pears. "Just like any system starting out, it takes time." Pears was recently hired to oversee NYFIX Natural's sales trading effort and build buyside relationships.

"We're all trying to make ourselves significant," Pears added. Pears previously headed equity trading at Victory Capital Management. At NYFIX, he runs a five-person desk.

The Process

A buyside trader enters an order in Millennium, with the average size order typically between 75,000 and 100,000 shares, according to Gasser. An executable indication then goes out to the roughly 70 money managers signed up for Natural. The size of each Natural indication is based on the type of stock: The IOI for a Dow Jones Industrial Average stock must be at least 25,000 shares; for an S&P 500 stock, at least 10,000 shares; and for all the other stocks, the minimum is 5,000 shares. Simultaneously, the order sits in Millennium and is exposed to orders already in the system or that pass through.

The 70 buyside participants receive the "live" indications via their Bloomberg terminals or their OMSs. They can also install a proprietary application NYFIX calls "Ticker." The trick, Gasser said, is in figuring out the best way for each customer to view his or her IOI. Everyone is different, he said. NYFIX's sales trading desk, besides performing its traditional functions, also alerts a client when it has an executable indication. Pears said sometimes the indications get buried and clients don't see them.

New Wrinkles