Agency brokerage Instinet has unveiled a new version of its execution management system that features new functionality that allows buyside traders to selectively expose all or portions of block orders to alternative trading venues Liquidnet and BlockCross.
The new Instinet functionality allows buyside traders to import orders from their order management systems into Newport for exposure to the blotter scraping technology of Liquidnet and Pulse. The service makes it possible for buyside traders to expose some of their orders toLiquidnet or Pulse, but not all. Many traders would prefer not to give those brokers unfettered access to their order management systems.
The trader simply selects or flags which block orders or a portion of blocks in the Newport EMS he wants executed, which places them into a separate auxiliary blotter. Once the orders are placed into the secondary blotter, the EMS will send out indications of interest via the FIX protocol to Liquidnet’s and BlockCross’ buyside networks. If a natural contra order is located, then the traders can choose to execute a trade via the Liquidnet or Pulse systems.
"The new EMS functionality helps clients deal with different workflow challenges and helps them find liquidity wherever it lies," said Jonathan Kellner, president, North America at Instinet. "The system allows traders to control what they’re going to expose to these trading facilities."
Liquidnet confirmed the incorporation of its blotter scraping technology into the Instinet EMS but declined further comment. Pulse Trading also confirmed its blotter scraping system is being used by Instinet and that Newport traders gain the full benefit of BlockCross liquidity.
Kellner said buyside traders can select on his desktop how much of their blotter to scrape or how much of a particular block is to free to trade or allocated to one of the two ATS.
Several agency brokers, ITG, BIDS Trading, Pipeline and eSpeed offer so-called blotter scraping by which their systems scan the order management systems of buyside. If the system finds both sides to an order it will notify the two traders who then have the opportunity to enter into a trade. While many traders have embraced the idea of blotter scraping some are leery of exposing their entire blotters to the broker. Some of the largest have actually built subsidiary blotters just for scraping.
About four hundred firms are already using Newport 3 and have access to the blotter scraping functionality. The goal, according to Kellner, is to continue adding broker neutral functionality so that a buyside trader can use it to access all of their brokers and available market liquidity.
Institutional investors are increasingly using auxiliary or secondary trading blotters to prevent block trading venues from seeing all of their orders so to limit information leakage. By using the Instinet functionality, the block venues now only get access to the auxiliary blotter, which includes block orders the trader is actively working.
At least one buyside trader is opting for new Instinet technology because he already permits his OMS to be scraped by three brokers. Phil Krauss, head trader at Harris Associates has shifted his blotter scraping crossing networks from his INDATA order management system to Newport 3 as the Instinet service consolidates all his TCA, market data feeds, IOI systems and other application to a single cost effective platform. While allowing Instinet’s system to scrape his uncommitted shares, he is hoping the system can be adapted to efficiently scrape portions of his committed orders as well.
"The Newport functionality allows me to access natural liquidity, which I know Liquidnet provides," said Krauss. "Now I have a one stop shop for all my trading needs in Newport."
This access to Liquidnet and Pulse benefits the crossing network as historically they could only access orders in a buyside trader’s order management system. According to Kellner, as the trend by the buyside towards using EMS versus OMS continues, Liquidnet and Pulse’s BlockCross can benefit as the destinations for this previously unseen uncommitted order flow.
The Newport 3 EMS with the blotter scraping functionality also helps Krauss get his block trades done at the midpoint of pricing levels without creating a market impact. Five to ten percent of his total trading business comes from blotter scraping crossing networks.
"This system will allow clients to access nearly all available liquidity and all of their order flow can be centralized through Newport," Kellner said.
Instinet also plans to offer this blotter scraping functionality to reach eSpeed’s Aqua, BIDS Trading, ITG Channel and Pipeline Trading networks later this year.
The blotter scraping software is not available on Instinet’s Portal EMS system.