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December 18, 2007

ITG's POSIT Blocks Broker Algos

By Nina Mehta

Investment Technology Group, for the second time, has banned broker-dealers from accessing its POSIT crossing system via algorithms. Citing a desire to increase the average execution size in POSIT, ITG said broker algos could no longer send flow into POSIT on behalf of buyside firms. Institutions must now access POSIT directly or through ITG's algos.

Chris Heckman, ITG's co-head of sales and trading, told customers in a Nov. 1 email that crossing systems "dominated by small orders with short durations and small execution sizes perform poorly.We must reverse this trend." He said POSIT's executed orders from sellside algos were one-tenth the average size of executions in POSIT.

ITG hopes to increase POSIT's average execution size to 10,000 shares from its current 4,000 to 6,000-share range, according to Tony Huck, co-head of sales and trading. Huck noted that earlier this year the range was higher, although he declined to be more specific.

ITG chief executive and president Robert Gasser told analysts on the day of the decision that "third-party dark aggregation has not been beneficial to our institutional POSIT constituency." He said algos, by pushing down POSIT's average execution size, impaired the buyside's ability to execute blocks.

ITG made a similar move to prohibit algos in spring 2006, when it put the kibosh on Credit Suisse's Guerrilla algo's access to POSIT. At the time, ITG executives said certain dark algos were offering some buysiders cheaper access to POSIT than they could get from the agency broker itself. ITG in subsequent months allowed broker algos to access POSIT as long as they adhered to certain rules.

This time around, the reason for the algo blockade is different. Gasser said the decision to disallow broker algos was made to preserve POSIT as a block venue. That action, he told analysts, is "pivotal to the positioning of POSIT as a premium, differentiated block offering."

Heckman told Traders Magazine that some brokers offering customers algorithmic access to POSIT appeared to give preference to their own or other liquidity through the algos. He said that adversely impacted the order flow POSIT received.

Dan Mathisson, head of the Advanced Execution Services group at Credit Suisse, said at a recent conference that ITG's move was a "defensive" attempt to maintain margins for another year or two.

About 10 broker algos were affected by ITG's decision, according to Huck. Eighty-five percent of POSIT's executed volume comes from institutions and 15 percent from the sellside, including brokers' cash and program desks as well as algorithmic flow. The cash and program desks will still have access to POSIT. Huck added that while some buyside desks used broker algos for POSIT access to ease their workflow, some of those algos "weren't properly accessing the POSIT suite."

ITG's decision was foreshadowed earlier this year when Pipeline Trading Systems pulled the plug on customers' use of sellside dark algos to access Pipeline. In that case, Pipeline said some sellside firms were not aggressively seeking executions in Pipeline, potentially compromising customers' ability to get the best executions.