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.”
The new Instinct Natural service will initially be available only to the largest of Merrill’s customers, according to Merrill Lynch executives.
Since Merrill’s service, for the first time, integrates its ‘low touch’ electronic services with its ‘high touch’ desks, the move was not without problems.
Internally, there were technical challenges around how to build a network across the floor that not only connected all of the desks, but also gave clients and Merrill’s traders enough control over their orders.
On the buyside, some traders are leery about the integration of the high touch desk into the electronic desk due to concerns that their sales trader would gain information about their algorithmic orders. Anonymity is a hallmark of brokers’ electronic offerings, while buyside traders typically share information when working with their high touch traders.
Merrill executives insist that anonymity will be preserved. “If the client does not want the order to be known to other people, the system works the order anonymously,” said Oliver Sung, a Merrill director of global execution services. “That is the default. But if they want their sales trader to know about it, they can. But those crosses are going to happen systematically.”
The average trade size on Liquidnet in December was close to 42,000 shares, according to Rosenblatt Securities. The average trade size on Goldman Sachs’ Sigma X dark pool, by comparison, was 167 shares.
