April 1, 2013

Block Trading, In Your Hand

By Tom Steinert-Threlkeld

The handheld device is the latest block crossing venue.

The New York Stock Exchange is taking the wraps off a five-month-old system that allows floor traders to effect crosses in blocks of 10,000 shares or more, using electronic broking devices.

"The objective here is to provide the trading floor community with a robust and viable tool that will allow them to facilitate primary market crosses on behalf of their customers," said Michael Rutigliano, senior vice president of floor trading operations at the exchange.

Michael Rutigliano

Ironically, this follows plans made by NYSE to shut down the New York Block Exchange, a joint venture with dark pool operator BIDS Trading. The venue, NYBX, which was launched in 2009, was designed to execute block trades, but failed to catch on because of a lack of market interest.

Under the new system, Big Board traders' eBroker devices will be programmed to make sure all block crosses comply with Regulation National Market System rules-specifically Rule 611, or the trade-through rule. Under the rule, traders cannot put up a print that falls outside the market's best bid or offer.

The rule is difficult for NYSE floor brokers to comply with when effecting crosses manually, as the market moves too fast.

To remedy that, the NYSE is programming the handhelds to monitor all quotes in the marketplace. When it detects an optimum moment for the floor broker to cross an order sitting in the handheld device, the system will send him an alert. The broker has 20 seconds to effect his cross by pushing a new button that automatically executes the trade and sends a report to the tape.

"With the speed of markets in quotes, what this tool allows is for the system to take care of quote minding on floor traders' behalf," Rutigliano said.

Since October, floor traders have used the new feature to executed traders involving roughly 100 million shares of stock, he said. The average trade size has been about 55,000 shares.

By comparison, a dark pool that specializes in block trades, Liquidnet, typically averages about 10 million shares a day. Liquidnet's average trade size in December was just shy of 42,000 shares.

To make it all happen, NYSE had to ask the Securities and Exchange Commission for permission to tweak its Rule 76, governing manual crosses, and introduce the 20-second "look back" provision.

The SEC granted permission in September.

"That is a great competitive rule," said Joseph Cangemi, head of U.S. equity trading at technology supplier ConvergEx, of the NYSE's "cross function" rule. "It is a rule that allows for them to have in place the ability to compete for the flow that is printed on the Trade Reporting Facility. That is a very, very good step in the right direction."

Brokers and operators of alternative trading systems, such as dark pools, report details of trades that occur off the national exchanges to the Trade Reporting Facility, maintained by the Financial Industry Regulatory Authority.

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