Merrill Lynch Launching Block Trading System
Traders Magazine Online News, February 4, 2013
Bank of America Merrill Lynch is offering its largest customers a new electronic block trading service that integrates the order management systems of several of its internal trading desks with its Instinct X dark pool.
Merrill’s plan is to capture and trade its customers’ large “parent” orders as opposed to the smaller “child” orders that typically have been traded in the Instinct X dark pool. The new service, called ‘Instinct Natural,’ is intended to act as a block-trading system similar to those operated by Liquidnet or BIDS Trading.
“Instinct Natural gives you the opportunity to trade with another block that might be on the other side of the floor, or with an order that is being worked by the electronic desk,” explained Adam Inzirillo, a Merrill director of global execution services. “It aggregates natural liquidity.”
The service will systematically combine the blotters, or order management systems, from a multitude of desks such as the electronic desk, the cash desk, the program trading desk and the derivatives desk.
The goal is to bring two large “natural” institutional orders together without any disintermediation by professional, or high frequency, traders.
“It removes any concerns the buyside has about trading with HFTs,” Inzirillo said. “Now you’re just trading against pure institutional flow and private client and our desks.”
Rather than feed a large order into an algorithm and let it parcel out small 100-share or 200-share child orders into the market at a measured pace, Merrill’s new service asks the buyside trader to place a large order directly into its alternative trading system.
As with BIDS, Liquidnet and other block-trading dark pools, Merrill’s new service works with conditional order placements. The buyside trader would rest a large order in the system and await an “invitation,” or notification, to trade. If the trader likes the terms of the trade, he will click on the invitation, which creates a bona fide order.
According to Merrill executives, the new service is an attempt to deal with a multitude of frustrations felt by buyside traders in trying to get large trades done: a decline in industry volume, the existence of high-frequency traders, and fragmentation in the marketplace as a whole and within individual firms’ trading rooms.
Despite the availability of liquidity on multiple desks within the larger brokerage firms, the buyside has expressed frustration in effectively accessing those desks. Besides working his order in an algorithm, the buyside trader may contact the broker’s cash desk, the program desk, and the derivatives desk in his search for liquidity. That can be a hassle.
“There is a growing subset of our clients that are demanding one pipeline to all the desks,” explained Rod Burns, Merrill’s head of West Coast portfolio products. “They want us to aggregate all the liquidity across the floor.”
On the cash side, Scott Bacigalupo, Americas head of cash equity sales and trading execution, in describing how his team uses Instinct Natural, said “The cash desk has always worked with various other desks to source potential liquidity for our clients, but Instinct Natural is formalizing the process so it’s no longer desk by desk or trader by trader. It allows us to connect with greater sources of liquidity more methodically.”
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