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October 14, 2009

Aqua Looks to Make Mark in Crossing

An ATS builds a base with hard-to-trade stocks

By Nina Mehta

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Is there room for another crossing system? The answer appears to be yes. A year and a half after Aqua Securities printed its first trade--in April 2008--the startup platform is nudging its way into buyside firms, enabling them to interact electronically with liquidity from mid-tier and regional brokers. Aqua is an alternative trading system for blocks, with a focus on micro- to mid-cap stocks.

Kevin Foley, Aqua Securities

For Kevin Foley, president and CEO of the 20-person firm, Aqua is gaining momentum at a time when traders are increasingly frustrated with small executions. In his view, Aqua is now comfortably in the middle phase of life for a new trading system. "In the first phase, your business is inversely correlated with market volatility, since users ignore you on active days," he said. "In the second phase, you're not correlated with market volatility. And in the third phase, you're positively correlated. You do more volume on busy days."

Business is advancing fast enough that Foley expects Aqua to be profitable later this year or in early 2010. Aqua got its start in 2007 as a joint venture by interdealer-broker Cantor Fitzgerald and eSpeed. ESpeed subsequently merged with BGC and formed BGC Partners, whose controlling interest is held by Cantor. Foley had been CEO of eSpeed before launching Aqua.

There are other signs that Aqua is making headway. The ATS is "rapidly approaching" more than 100 buyside firms who've installed Aqua's software and can use the system, Foley said. The firm also has 150 broker-dealers on the platform. These are mainly mid-tier, regional and specialty brokers.

Foley, however, won't say how much volume the ATS does every month. "That's not what we're after, since our game is illiquid stocks," he said. "We get thousands of orders a week, not thousands of orders a second. But when we execute, we're usually the largest print of the day in those names."


Hybrid System

Aqua is essentially a hybrid of several systems that trade or facilitate block orders. Like Liquidnet, it alerts buyside traders about available liquidity, giving them control over what happens next. In the case of Aqua, though, the liquidity always comes from the sellside.

Aqua also functions as an intermediary of sorts for upstairs desks seeking naturals for client orders. Indeed, Aqua performs the service of an indications-of-interest-like system, akin to Tradeweb (formerly AutEx) or Bloomberg's IOI functionality, but one that's perfectly targeted. Instead of displaying indications, Aqua has firm orders, and the information is sent only to those with executable contra-side orders in their blotters, not blasted publicly to buyside firms.