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February 16, 2009

LeveL Shifts Focus for Block Flow

By James Ramage

LeveL ATS is diversifying its business to attract more block orders from high-touch traders. To do this, the Boston-based dark pool will unveil a block order type by the quarter's end.

LeveL's business model has relied on small order flow for its volume driven by algorithms and smart order routers. Now instead of just having algorithms meet one another inside LeveL, the order type--called Smart Block--aims to encourage more high-touch traders to rest large orders within.

And offering Smart Block brings the firm to a new customer base, said Whit Conary, LeveL's president.

"That is really the next step in our growth," he said. "We're reaching out to the high-touch orders, the orders that have more human intervention, somebody actually working a block. We've had many of the sellside OMSs connect. This will allow a lot of the large, high-touch players to come in."

Smart Block lets customers set a trigger price-either a set price or a percentage of the price at which the customer enters the order. After the price of the stock hits that trigger price, Conary said, there will be a maximum number of executions allowed in "time buckets."

The trigger serves to control execution amounts when the market moves against the order, either through normal market moves or gaming. And slicing the order into time buckets should ensure that a customer won't get an entire execution at a price inferior to the market price when the order was placed, Conary said.

But the client will still be able to accept smaller executions, too, as the stock goes against him.

"We're offering another tool to give customers comfort about entering a large block to sit over a long period of time," Conary said, "knowing that somebody can't run the price on them and fill them at an inferior price."

From September through November, LeveL's trade size averaged roughly 400 shares, according to Rosenblatt Securities, an agency brokerage that tracks dark pool volume. If the new order type does attract more blocks, that average number should increase.

LeveL is one of several algo-heavy dark pools making moves to attract block orders, said Justin Schack, a vice president and market structure analyst at Rosenblatt Securities. For example, Goldman Sachs unveiled in December a point-in-time crossing session for its Sigma X pool in an attempt to attract larger orders. Sigma X's trade size averaged 600 shares from September through November, Rosenblatt numbers showed.

"There's a growing awareness that even though an increasing percentage of overall volume is getting done in dark pools, it doesn't mean that block trading is increasing," Schack said. "You're seeing some of the pools now respond to a demand for more block trading." Schack, whose firm accesses LeveL, thinks the idea behind Smart Block is a good one. Still, he said, the system "must give traders confidence that they can rest big orders in the pool without information leaking to people who might want to game them."

The buyside can connect to LeveL, but only through sellside sponsorship, Conary said. The ATS has no plans to change this.

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