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March 18, 2010

Pragma Launches Benchmark Trades for the Dark

By Michael Scotti

Pragma Securities launched a new dark pool last month that is said to be the first to offer benchmark trades at the open, close and throughout the day.

Doug Rivelli

The new ATS is called Onecross. It plans to compete with the primary markets by offering an opening cross (market on open) and a closing cross (market on close), according to company officials.

Pragma will also roll out two separate partial-day crosses for investors seeking the volume-weighted average price. The two partial-day VWAP crosses will run from 11 a.m. until the close and from 12:15 p.m. until the close. (Collectively, the crosses at the open, close and the two partial-day VWAP crosses are said to be the first of their kind in a dark pool.)

As the VWAP orders match, indicative fills are sent to each client so that orders don't get over-executed. The actual closing VWAP price is sent to clients at the end of the day.

Pragma is a New York-based provider of quantitative trading solutions. The firm is best known for its dark pool aggregator OnePipe and its relationship with Weeden & Co., a Pragma investor.

Doug Rivelli, chief executive of Pragma Securities, said Onecross was designed to stem leakage and avoid market impact, while at the same time offering clients a way to meet their benchmarks in a next-generation crossing network.

"This is not just a new twist on the midpoint cross," he said. "This is a dramatically new crossing concept, which is the concept of benchmark-specific crossing."

The dark pool VWAP function is attractive, one buyside trader said, because the price is simply a calculation and orders avoid market risk. He said that a VWAP order left with an upstairs broker could present a problem if a big print went up. That could lead the broker to chase the stock in the marketplace at higher prices.

Rivelli said the primary market offers fundamental problems for clients who have block-size orders or sensitive orders that are a large percentage of the average daily volume. These "blocky" or "sensitive" orders send signals that there is a buyer or seller in the market, he said.

NYSE Euronext did not respond for comment.

Brendan Cummins, a Pragma director, said investors have avoided the open in particular, owing to a lack of liquidity. He thinks that if a product could reintroduce liquidity at the open, investors would then be more interested to trade. Cummins also thinks the close presents a huge opportunity to capture business, as that's when the heaviest volume of trading gets done.

The on-open cross runs from 8 a.m. until 9:27 a.m., while the on-close cross runs from 8 a.m. until 3:59 p.m.

Tim Sargent, president and chief executive of Quantitative Services Group, which measures trading performance for institutional money managers, called Onecross an "innovative" product because of its benchmark offering. "In a dark pool, this is a novelty," he said.

He agreed that the open lacks liquidity. He also thought Onecross could attract liquidity on the close, as well. "Everyone is concerned about signaling issues," Sargent said. But he also wondered if others would imitate it if it becomes highly liquid and a profitable feature.

Rivelli said he expects buy-in from clients. "They are telling us that they will be committing order flow to these matches because they are very unique."


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