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July 1, 2008

Buysiders Get Another Arrow in their Quiver

New IOI Tool Hits the Street

By Nina Mehta

Also in this article

The traditional indications-of-interest arena is getting a twist. To find contra-side liquidity, an entrepreneurial institution could decide to simply pop out a specialized IOI that reaches other buyside firms with more than $10 billion in equity assets.

That, at least, is what Pulse Trading and Bloomberg Tradebook envision. The two agency broker-dealers recently formalized their co-distribution agreement for Pulse's BlockCross dark pool. Among other trading options, customers of either firm can send out IOIs to other buysiders based on orders they rest in BlockCross.

But here's the key: These broker-sponsored IOIs, which are controlled by the buyside traders, can be sent to institutions over Bloomberg's vast IOI network. The IOIs can currently be sent to the entire universe of thousands of buyside firms or to segments of the buyside community such as institutions with over $10 billion in equity assets.

"This is a tool for buyside traders alongside their other tools to find liquidity," says Wally Sullivan, a managing partner at Pulse Trading. "The buyside posting their own indications may not be the answer in all situations, but it's an option for some traders and some orders." He adds that when a buyside trader sends out a BlockCross indication, "it's telling other traders: Meet me in BlockCross.'"

Mark Kuzminskas, director of equity trading at Robeco Investment Management, likes the idea of buyside IOIs. He points out that "buyside IOIs are the natural next step in the evolution of the trading process as buyside traders seek greater control over their order flow and less information leakage." Robeco has $18 billion in equities.

Institutional Connections

This new IOI product ventures on the traditional turf of sellside firms. But Pulse isn't the first broker to do this. In the 1990s, Instinet had a popular product called I-only that allowed customers to send indications to other institutional customers. That product no longer exists.

Now, Investment Technology Group's BLOCKalert and NYFIX Millennium's Natural product do something similar. Both allow buysiders to send out indications based on firm orders to other institutions. BLOCKalert, a joint venture between ITG and Merrill Lynch, transacted a daily average of 11 million shares, with an average execution size of over 40,000 shares, in the first quarter of this year, according to Chris Heckman, a managing director at ITG.

Buyside IOIs have inherent advantages, notes Pulse's Sullivan. In his view, the chief benefit of BlockCross indications is that traders control the release of information. In addition, he says, those receiving indications from BLKX, the BlockCross MPID, know the IOIs are based on executable orders from another natural. That loosens the reins. Sullivan says the buyside IOIs in BlockCross have a hit rate of over 35 percent. Those names, he adds, have typically already exhausted the traditional dark pool options.

For a BlockCross indication to be posted, it must be marketable at the midpoint of the national best bid and offer at that time. "A firm must stand ready to trade the stock at the time the IOI is posted," Sullivan says. The IOI must show a minimum of 5,000 shares, and if a firm responds with an order on the other side, the trade automatically executes in the ATS at the NBBO midpoint. It executes at the "show size or greater," Sullivan says.