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February 1, 2011

Dark Pool Dream Lives

By Peter Chapman

Dark pool operator Ballista Securities may be gone, but believers in electronic crossing systems are undaunted. The New York-based agency brokerage attempted to introduce anonymous electronic crossing, or a dark pool, into the options market in the middle of 2008, but ran smack into the headwinds of the global financial crisis, sources said.

The company hung on, albeit in a different form, until 2010, but expired at the end of last year. Rank-and-file employees were let go the week before Christmas as the firm dealt with a cash crunch. Senior management was said to be trying to raise funds to restart the operation.

Despite the poor showing by Ballista, existing and potential sponsors of electronic crossing mechanisms see a bright future.

"Just because Ballista wasn't successful, I don't think it means that a dark pool won't take off in options," said Bob Fitzsimmons, head of options trading at Investment Technology Group. "The timing wasn't right, nor was the vehicle."

Fitzsimmons added that ITG is watching developments closely in the institutional options trading business and could, at some time, come out with a dark pool of its own. "It would be a natural complement to our POSIT offering," he said.

An existing dark pool operator is also bullish. Pipeline Trading operates the Blind Bid Options Cross, which is geared toward the plain vanilla options trades of traditional money managers. Dave Mortimer, in charge of Pipeline's options business, said growth is slow but the buyside "needs our product. They have huge size they want to get done."

By contrast, Ballista, which began full-scale operations in August 2008, targeted hedge funds and institutional brokers doing "vol" trades, or those involving an option and a stock. The goal was to compete with the interdealer brokers that facilitate trades between institutional broker-dealers.

Ballista originally tried to elbow aside such interdealer brokers as GFI and ICAP. It derided their methods as outdated and promised technology would usher in a more efficient trading process. Users were hedge funds trading volatility and institutional brokers hedging their risks.

That strategy failed and was abandoned in late 2009, after the firm successfully completed a second round of funding that raised $12 million, according to a Form D filing. Four new investors included heavyweights Morgan Stanley, Susquehanna Growth Equity, Knight Capital Group and the International Securities Exchange. They joined employees, patent holders and others, according to the filing.

In December 2009, Ballista co-founder Rob Newhouse was replaced as chief executive by Mark Monahan, a former executive with ICAP. The plan was to remake Ballista along the lines of a traditional interdealer broker, albeit one with an anonymous crossing mechanism. The firm staffed up with sales traders, but to no avail.


An article about the Chicago Board Options Exchange in the January issue of Traders Magazine titled "CBOE FLEXes its Muscles" contained two errors. In 2009, CBOE traded 3.5 million FLEX contracts, not one million, as reported. In 2008, CBOE traded about one million FLEX contracts, not 226,000. Traders Magazine regrets the errors.


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