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December 8, 2009

NYSE Brokers Create Block Platform

By Nina Mehta

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  • NYSE Brokers Create Block Platform

Mahogany Partners, a consortium of floor brokerages on the New York Stock Exchange, would like to reclaim blocks for the mid-tier firms that once made their living executing primarily large trades at the Big Board.

Gregory Johnston

The New York-based consulting firm is managing a consortium of 12 brokerages that have banded together with the idea of using their negotiation skills to interact electronically with block liquidity residing on each other's order management systems and in block dark pools. These firms trade all listed securities.

Mahogany has arranged with BNY ConvergEx Group to build "blotter-polling technology" and an interface that allows its member firms to seek out block trades with one another and specific dark pools. "This will radically change the way these brokers access block liquidity," said Gregory Johnston, CEO of Mahogany Partners.

The NYSE used to be the heart of the block-trading universe. But that changed with Regulation NMS and the dispersion of NYSE-listed liquidity to other venues.

"We represent this group of traders that have great intellectual capital and clear ideas about how they can make block trading more efficient in today's modern technology-driven market structure," Johnston said. The firms in the consortium, which include Kabrik Trading and Farina and Associates, are typically midsize firms that emerged from the floor, have expertise trading blocks and the relationships to support it.

Andrew Levine, a managing director at BNY ConvergEx, said his firm is building blotter-polling technology and a companion blotter, or front end, to allow Mahogany's member firms to "interact with one another, access the ConvergEx Cross [dark pool] and eventually access block liquidity in other dark pools." The brokers will be able to electronically trade with one another and with blocks from ConvergEx Cross in the first quarter of next year. Access to other pools is planned for the next phase of the technology.

The premise of this arrangement is that the consortium members represent institutional investors and therefore have large orders sitting on their OMSs. After spending years trading with each other on the NYSE floor as agents, they trust the group they've formed to build a system that protects their order individual order flow even as it seeks to aggregate their liquidity.

Buyside firms are used to having their blotters "scraped" or electronically accessed by the operators of dark pools trying to match up orders. Sellside firms, however, have so far not ventured in that direction. The "blotter polling" that ConvergEx does is a mechanism that, like scraping, enables the system to determine what orders are sitting in an OMS.