Instinet Looks to Attract Blocks with New Dark Pool

In a nod to the pervasive use of algorithms in executing blocks, Instinet now has a new dark pool aimed at aggregating orders being worked in algos into larger trades. The new pool, rolled out in test form in June but announced today, is called BLX.

Although BLX is entering a populous landscape of dozens of dark pools, it has a twist intended to set it apart. "It’s a combination of continuous and point-in-time crossing in an attempt to bring back blocks," said Jonathan Kellner, president of Instinet North America. "People want more blocks, but systems are currently focused on peer-to-peer trades. This is multi-party and algo-friendly." Instinet is a subsidiary of Nomura Holdings.

The goal of BLX is to enable blocks to build by aggregating flow, most likely from algos working institutional orders, to match against larger block orders, typically from naturals resting in the BLX dark pool. The twist is that a second match takes place three seconds after the first.

Once enough orders arrive to meet BLX’s minimums for crosses and a match takes place, BLX launches a second match. The first occurs at the midpoint of a randomly selected national best bid and offer over a 10-second period. The second match takes place three seconds after the first and at the same price, as long as that price is still within the NBBO.

The point of the second match is to draw flow out of the woodwork by letting firms know a match just occurred in a particular name. After the initial match, the system sends out what Instinet calls IOXs, or "indication-of-cross" messages, to anyone who wants to receive them. These will typically be algos from broker-dealers. IOX messages include only the name of the stock that just matched, with no additional information and no indication of which side may have residual shares left over from the first match.

Kellner points out that many block orders now trade through algorithms because they cannot wait for a large match. Upstairs desks arranging crosses, he said, used to also gather more buy and sell flow by calling holders of a stock to let them know the firm was about to put up a print. "What we’re doing isn’t new," Kellner said. "We just automated that process. We’re doing it electronically."

Christian Dubois, managing partner at brokerage Pulse Trading, thinks the second match could appeal to algos pursuing volume-weighted-average-price strategies in particular. "When a block is going to go up, algos will have to play catch-up," he said. "This gives algos coming into the system a chance to get in on the block at the same price."

Pulse has decided to enable its institutional customers that access BlockCross, a dark pool it operates, to also access BLX. For Pulse, the relationship with Instinet means its 100-plus customers with full blotter integration to BlockCross now have opt-in access to a type of liquidity they weren’t previously accessing through BlockCross. This increases their chance of finding the contra side for big orders, according to Pulse.

"BLX takes streaming liquidity and bunches it into block-size trades that are very interesting to our customers," Dubois said. "Our traders do not use BlockCross to capture the small prints typical of streaming liquidity, but BLX’s approach turns them into bigger trades that make sense for institutions and fit well into our workflow." BlockCross’s minimum order size is 5,000 shares, so the orders sent into BLX are large.

The minimum print for BLX’s first match ranges from 1,000 to 5,000 shares, based on the symbol’s average daily volume. However, Kellner said, prints for most of September averaged over 16,000 shares. The large print size indicates that the resting liquidity in BLX is block flow, probably with high minimum execution sizes. He declined to say how much flow BLX is executing on average daily, but said executions take place every day. He added that these are "very meaningful prints" and that they are often the second- or third-largest prints for the day in the particular name.

Still, the vast majority of BLX’s volume is currently in the first print, not the second. Kellner said he expected that algos from other firms would gradually begin to receive IOX orders and that volume in the second print could eventually become substantial.

Instinet said it has taken pains to avoid information leakage that could lead to gaming concerns. Orders that execute in the initial match are filled on a pro-rata basis. However, customers don’t get their fills for three seconds, to avoid imbalance information from leaking out. Both the initial and second match print after the second match takes place (if it executes any volume). The two matches print as separate trades, even though the price is the same.

Some of the novel aspects of BLX are similar to elements of other crossing systems. The ISE Stock Exchange, in its MidPoint Match, for instance, has an order type that lets participants drum up interest in a particular symbol, without revealing order or side information. NYBX, the New York Stock Exchange’s block trading facility, is able to aggregate orders from multiple counterparties to match against large resting orders. And Goldman Sachs Electronic Trading earlier in the year said it was considering point-in-time crosses in individual securities through Sigma X, if interest in a particular name warranted a cross.

At Instinet, firms can place orders into BLX through Instinet’s Newport 3 and Instinet Trading Portal EMS execution platforms, through Instinet Nighthawk algos, as well as through Pulse Trading. In the latter case, customers pay the normal BlockCross fee of 1 cent per share, with Pulse then paying Instinet for executions in BLX.

BLX charges everyone for executions. According to Kellner, the fee is a block-type rate. "We believe in the system," he said. "People will pay for quality executions." He added that institutional volume seems to be coming back after the credit crisis, and that much of that liquidity is likely to be in algos.

Instinet’s new dark pool marks the fifth pool at Instinet. The agency broker has CBX, a continuous dark pool, and a series of intraday point-in-time crosses, designed to aggregate flow at specific points in time. It has a full-day cross for VWAP orders. It also has a post-close cross that executes crosses at the primary market’s closing price for the particular security.