Dark pool operator Aqua Securities has moved out of offices occupied by Cantor Fitzgerald and BGC Partners – to demonstrate its operations are separate.
The move to a new location 18 blocks south of Cantor’s offices in Midtown Manhattan can be traced to the Pipeline Trading Systems debacle of October 2011. In that incident, the Securities and Exchange Commission fined the dark pool operator $800,000 for failing to disclose that a large percentage of its orders were being filled by a trading operation affiliated with the firm.
Since then, buyside traders have grown distrustful of the handling of their confidential order information by brokers running alternative trading systems, also known as dark pools.
Aqua Securities is jointly owned by Cantor Fitzgerald, which has trading desks around the world and an institutional sales force serving 3,500 clients, and BGC Partners, a large interdealer broker whose initials are derived from Cantor Fitzgerald founder B. Gerald Cantor.
“We do business with Cantor’s customers and potential customers and they want to know that their trading is confidential,” explained Kevin Foley, Aqua’s president and chief executive officer. “There has always been a Chinese Wall between us and the rest of the company, but in the past year we’ve taken steps to become more obviously separate. We are now at a separate address. We used to be on a separate floor with a locked entrance. We are now down at 125 Park Avenue. It’s something we had been working on from the beginning of last year. It’s directly related to Pipeline blowing up.”
From its earliest days, Pipeline found matches for some of its customers’ orders by passing them to a related trading unit, which worked them in the open market. The process was contrary to Pipeline’s assurances to its customers that their orders were traded anonymously within its alternative trading system. Pipeline last year shut down, after the SEC case erupted.
Like Pipeline, Aqua is an electronic block-trading system designed for money managers that is supposed to eliminate any leakage of valuable information regarding their large orders.
In Aqua’s case, its customers were concerned that their order information might be shared with Cantor’s traders. They wanted more of an assurance that that could not happen, Foley said.
Cantor’s headquarters are located on East 59th Street in Manhattan. Aqua’s new offices are located off of East 41st Street.
Foley said the Pipeline affair was very bad news for all operators of dark pools, as users questioned their handling of confidential order information. The recent censure by the SEC of the order handling practices of the Level ATS did not help matters, Foley said. Last year, the SEC fined Level for not properly guarding confidential customer information, from a routing system vendor that could use it for its own business purposes.
The Pipeline affair “was initially a bad thing for us,” he said. “It was bad for the entire category. A few planes crash and people don’t want to get on airplanes. It’s not good for the competitors.
But, since then, the regulatory probes have given Aqua’s business a boost, Foley added, because the investigations brought to light differences in how ATS-operators handled information security.”
With Aqua’s approach, the clients’ orders never move outside their own firewalls, Foley explained.
“Instead of having a piece of software at their site that sucks all the orders out of the order management system and centralizes them at our site, we have a piece of software that sits behind their firewall,’’ Foley said. “It stays behind the buyside’s firewall. When we get an order from a liquidity provider, we encrypt it and send it out to all of our participants. It goes to an Aqua participant’s server that is sitting behind his firewall.”
Trades in Aqua are initiated when a broker, or liquidity provider, transmits a firm order into the system. A buyside trader is then alerted to the presence of the order and invited to trade by sending in an immediate-or-cancel order. If the buyside declines to trade, no information is given up, Foley explained.
“Because we don’t match buyside orders with each other, we don’t collect them centrally,” Foley said. “Because we don’t collect them centrally, we don’t know what they are. And because we don’t know what they are, we can’t betray our clients’ trust by leaking their information to other people.”
The exec noted that Aqua’s business had “more than doubled” in 2012, although he declined to reveal volume data. That was after a flat 2010 and 2011, he said, and was due to three factors: trouble at competitors, a reinvigorated sales push and more of a willingness by the buyside to trade in blocks.
Aqua added several sales people last year, bringing the total staff size to 16, according to Foley.
