Fidelity Investments has launched a new anonymous trading venue that is focused on helping institutional traders find buyers or sellers of large blocks of stock, using retail order flow.
The invitation-only venue, called the Block Liquidity Opportunity Cross, is an extension of the company’s alternative trading system, CrossStream.
The trading system, which goes by the acronym BLOX, has been in beta testing since Oct. 1 and currently has some 15 clients trading on it, according to John M. Donahue, head of equity trading at Fidelity Capital Markets. The dark venue was launched to help institutional investors access retail order flow from a variety of retail sources and avoid the toxicity sometimes found in dark pools, he added.
“We have internal order flow that is untapped and clean and that is what the buyside is interested in,” Donahue said.
He noted buyside traders are increasingly interested in executing block trades to improve execution quality. Still, they are worried about a lack of clarity on how trades get executed, leakage of information about their trades or trading strategis and control of the process of finding liquidity. BLOX, he added, offers an environment for investors to seek price and size improvement with confidence and minimal market impact.
In order to safeguard the integrity of the venue, Fidelity said buysiders are allowed to tap into BLOX, increasing the likelihood of a block trade, but high-frequency traders are kept out. Donahue said 35 percent of the shares coming from its retail brokerage business are considered block size, meaning typically they involve 10,000 shares or more.
Fidelity’s retail brokerage business trades approximately 535 million shares on average per day, Donahue said. Fidelity also takes in order flow from other large fund firms and asset managers.
“We’re looking at retail order flow from other firms like Fidelity within the dark pool,” Donahue said. “And our goal is to have the top 100 buyside clients interacting with all this this retail order flow by the end of 2013.”
Two “non-wholesaler sources” of retail business have approached Fidelity about having their order flow posted and executed in the venue, Donahue said.
Through CrossStream, BLOX anonymously matches Fidelity clients’ orders against the diverse order flow of Fidelity’s brokerage businesses. The system does not publish bids and offers and before clients’ orders are routed to the market. All executions occur at midpoint, providing price improvement for trades.
