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February 16, 2009

NYSE Rolls Out Block Offering

By Nina Mehta

The New York Stock Exchange expects to be the first exchange out of the gate with an electronic block offering that competes with existing dark pools. In mid-January the exchange planned to launch its New York Block Exchange facility later in the month, pending Securities and Exchange Commission approval.

"NYBX will help us bring blocks back," said Joe Mecane, executive vice president for U.S. markets at NYSE Euronext. "It's part of our block trading strategy, which is an important part of the [NYSE] strategy. Issuers value the fact that we try to foster relative transparency and lower market-impact costs."

In December, 23 percent of NYSE's volume was executed via blocks of over 10,000 shares, even as the Big Board's market share in its listed names was around 27 percent, down from 80 percent in 2006. In the early 1990s, about half of New York's volume was blocks.

Jamie Selway, managing director at broker White Cap Trading, notes that NYBX is different from other block initiatives. "Tapping into the reserve books of exchanges is the Holy Grail of dark pools" because of the latent liquidity they contain, he said. "The NYSE has talked about re-aggregating trades into blocks for years, but this represents a real effort to do so electronically."

NYBX will essentially be a dark pool at the heart of the NYSE. But unlike crossing systems and broker-sponsored dark pools, this venture brings together dark liquidity and the NYSE's deep order book of displayed and reserve, or non-displayed, orders. NYBX also allows executions outside the national best bid or offer, routing out orders to execute against protected quotes if an NYBX execution would otherwise trade through those quotes.

An electronic facility of the NYSE, NYBX is a 50-50 joint venture between NYSE and BIDS Holdings, the parent of the BIDS Trading dark pool. The latter, also geared to blocks, is a separate dark pool that connects about 40 sellside and 35 buyside firms.

NYBX will continuously match and execute orders sent into its facility. Non-displayed orders can be sent into the facility in one of two ways. NYSE member firms and their customers can submit orders to NYBX, and BIDS users can opt to send orders to NYBX in addition to the BIDS dark pool. NYBX orders can include a "minimum triggering volume" to avoid the problem of not getting enough of an order executed.

Tim Mahoney, CEO of BIDS, notes that NYBX offers more flexibility than existing dark pools. NYBX can be used by both buyside and sellside traders, he said, and NYBX orders can interact with the public displayed market and dark liquidity. Another benefit is the NYSE's reach. "NYBX is a utility," he said. "It's open to any member of the NYSE, and the NYSE has a big footprint."

The New York will charge NYBX users a fixed rate that's in the ballpark of what other market centers charge liquidity takers. NYSE's designated market makers and supplemental liquidity providers will not initially be able to send orders into NYBX, but may be able to participate in NYBX's "phase two," Mecane said. NYSE may also expand its block pool to include Big Board-listed names in NYSE Arca's book and eventually Nasdaq-listed and NYSE Alternext-listed names, Mecane added.

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