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October 19, 2006

Broker Group Readies Another Dark Pool Launch

By Peter Chapman

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  • Broker Group Readies Another Dark Pool Launch

Make room for another alternative trading system. A group of five major Wall Street firms is launching a "dark pool" called Level ATS that will take its place among a growing roster of similar crossing mechanisms. Citigroup, Credit Suisse, Merrill Lynch, Lehman Brothers and Fidelity Investments have formed a limited partnership called EBX that will own and operate Level ATS.

The platform, featuring two distinct levels of trading opportunities, was built by Lava Trading and will be supported technologically and operationally under a contract

with the Boston Stock Exchange. Lava will also funnel order flow from its vast trading network into Level.

Whit Conary, a former Boston Stock Exchange specialist, will run the Boston-based venture. "More firms are building their own alternative trading systems," Conary says.

"We saw an opportunity to provide one to firms that hadn't already built an ATS. But as more of these systems pop up, we also saw this as a way to aggregate all these pools into one," he says.

Jose Marques is chairman of the EBX board and a director at Credit Suisse with responsibility for the big broker's CrossFinder ATS, market structure investments and electronic trading. He says Level addresses the problem of fragmentation.

"Fragmentation of dark liquidity is an increasingly important issue in today's market," he told Traders Magazine. "Level was created to facilitate access to dark liquidity pools and reduce fragmentation."

Broader Initiative

Credit Suisse invested in the Level platform, Marques added, as part of a broader initiative to "foster robust liquidity pools while working to ensure a wide variety of execution options for our clients."

Crossing systems such as Level are typically used to match large buy and sell orders. By operating out of view of the broader marketplace, they offer their users a chance to complete trades without adverse price impact. Trades are often done at the bid-ask midpoint.

Level joins a growing list of crossing systems being developed either for internal use by large broker-dealers or for the trading community at large. "Public" platforms total close to 10, including new ones from Nasdaq and the ISE Stock Exchange.

Level, an NASD-registered broker-dealer, has been in the making for about two years. The original plans involved the participation and investment of the Boston Stock Exchange.

However, the self-regulatory organization had to drop out of the Level project after the Securities and Exchange Commission decided SROs should not own broker-dealers except for routing purposes. The Boston then divested itself of its ownership in the project.

The make-up of the initial Level group is similar to the one backing the new Boston Equities Exchange, an affiliate of the BSE: the Boston, Credit Suisse, Lehman, Fidelity and Citigroup.

For Level, the Boston and its parent BSX Group are slated to provide technological, administrative and market operations services on a contractual basis. NASD will regulate the new venture.

Conary himself spent a number of years as a specialist on the floor of the Boston, where he was a partner with the firm Ward, Conary & Murphy. He merged that firm with Moors & Cabot a few years ago. Earlier this year, Conary left the regional broker-dealer to work full-time on the Level initiative.