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March 9, 2009

Clients Shop Blocks Over REDIPlus

By Nina Mehta

Institutional customers of Goldman Sachs have for years used the broker's REDIPlus execution management system to work their orders in the open market. Now they can use the trading platform to shop their blocks within Goldman's network of customers.

Goldman recently incorporated messaging technology into REDIPlus that allows a user to notify others that it has a large block to trade. Rather than ask a Goldman Sachs sales trader to shop the block, buyside traders can do it themselves. "It's a way to invite block contras to interact with you," said Rishi Nangalia, global head of business development at GSET.

Goldman calls its product Block Signals. In developing Block Signals, Goldman takes a page from the playbook of Liquidnet, a communications system that scans traders' order management systems and alerts them about potential trades with other Liquidnet users. Goldman's approach is also similar to those of some dark-pool operators that transmit messages to others notifying them of orders residing in their pools.

Nangalia, however, stresses that Block Signals is different from existing efforts. It's used solely within the REDIPlus community, he said. GSET also knows who has contra-side liquidity since the orders are on the blotter, so alerts are sent only to those with firm contra-side orders. The product's users must meet "certain quality criteria," Nangalia added. They control whether or not signals are sent out, but GSET controls who receives the signals. Block Signals users cannot segment the group of alert recipients for their orders to, for instance, just the buyside.

Block Signals is possible because "we own the front end and the [Sigma X] matching engine," Nangalia said. He added that he hopes Block Signals will eventually have about 500 users. Users can include institutions, hedge funds and broker-dealers.

Traders can employ Block Signals on an order-by-order basis. A trader who wants to signal those with contra-side orders puts his or her order into Goldman's Sigma X dark pool and sends out the signals. Interested recipients can put their block order, or a block-size chunk of that larger order, into Sigma X. The execution takes place automatically, based on the limit prices of the two traders. The price is always within the national best bid and offer.

Block Signals has minimum execution quantities to prevent clients from fishing for information with smaller orders. For a large-cap stock, the minimum is 25,000 shares. For a mid-cap, it's 10,000 shares. Small-caps have a 5,000-share floor. Senders and receivers can also specify higher minimum executable quantities.

The goal is to get traders with block-size orders to open up if there's a chance that doing so could result in an execution. But to do this, Goldman must prevent signal recipients from using the information to their advantage. "Signals are sent only to the small community that's relevant," Nangalia said. "Responding to [an] order generates more signals" in the future. The aim is that that will encourage self-policing by customers who want to continue to receive Block Alerts.

Goldman will also do its own policing. "Traders can't dissociate intent from action," Nangalia said. "We will monitor for people loading up names with the intent to get signals but not act on them." He added that the firm will track the behavior and performance of community members, "such as how often they receive a signal, how they respond and what the hit rate is." Customers who aren't using Block Signals to effect blocks will lose their access to the signals.

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