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Elaine Wah

Modern Markets, Modern Metrics - A Blog By IEX

In this blog by IEX's Elaine Wah, the newest public exchange looks to refute public claims that the metrics it uses are designed to inflate its own volume numbers and mislead people.

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August 14, 2007

Utility Dark Pools Start to Take Off

By Nina Mehta

Three dark pools set up as industry utilities offering broker-dealers and their customers low-cost executions are attracting more flow from member firms-and have the executions to prove it.

LeveL and Block Interest Discovery Service, two crossing systems launched this year by broker-dealer consortia, have seen dramatic increases in their trading, with LeveL last month climbing 50 percent over its June volume. BIDS had average daily volume last month of 16.9 million, nearly doubling June's figure.

LeveL and BIDS in June had average daily volumes of 14 million shares and 8.8 million shares, respectively. ISE Stock Exchange's MidPoint Match product is executing about 7.2 million shares per day-60 percent of the exchange's average daily volume. Some of the volume in these pools appears to be occurring at the expense of executions on other markets or venues.

Meanwhile, buyside-only system Liquidnet announced average daily volume of 54.6 million for the second quarter, and NYFIX Millennium executed an average of about 54 million shares a day in July.

LeveL president Whit Conary said the majority of executions on his platform come from algorithmic flow en route to exchanges and ECNs. "We get a lot of immediate-or-cancel orders on the way to the market," he said. LeveL's average execution size is around 300 shares.

LeveL's July average daily volume, through July 20, was 21.2 million shares, including one day when the platform executed more than 30 million shares. About 80 percent of LeveL's executed volume comes from seven algorithms from among the 12 broker-dealers connected to LeveL, Conary said. Those 12 include the platform's five brokerage firm investors. Conary expects another 12 brokers to be connected to LeveL by Labor Day.

BIDS surpassed the 20-million-share mark three times in the first three weeks of July. The platform has 10 of its dozen broker-dealer investors connected. However, the pool is open to everyone: buyside firms, sellside firms that are BIDS investors and sellside firms that are not. BIDS is in the process of connecting to buyside order management systems, sellside OMSs and execution management platforms.

Both consortia platforms say their pricing is a key attraction. BIDS, which is geared toward block trades, charges less than half a cent per share-less than competitors Pipeline, Liquidnet and ITG's Posit. BIDS is also considering volume-based discounts, as well as other kinds of pricing, such as a maker-taker model. LeveL, on the other hand, charges liquidity takers a low 5 cents for 100 shares, while resting orders execute for free.

Some of the volume executing on these platforms consists of orders seeking price improvement. "When Regulation NMS took effect, a lot of price improvement moved off exchanges, because they became automated venues where the price you see is the price you get," Conary said. "Price improvement is becoming more specific to dark pools now."

However, that doesn't account for all the volume in these dark pools. The market share of crossing platforms is growing, but overall industry volume is increasing as well. Market participants note that some of the industry's increase in volume hails from the rise of algorithmic trading.

According to BIDS chief executive Tim Mahoney, speculating on where the flow is coming from so early in the game is difficult. He said volume on his block platform is increasing as more firms connect.