Goldman Sachs Electronic Trading, operator of the industry’s largest dark pool, last week launched X-Cross, a “point-in-time” cross aimed at blocks. That made Goldman the latest in a long list of contenders with an electronic crossing product geared to large trades.
X-Cross is Goldman’s “first foray into moving upstream from child-level crossing,” said Rishi Nangalia, global head of business development for GSET, at a media briefing last week. Child orders are the smaller orders, derived from large orders, that get pieced into the market by algorithms.
A point-in-time cross is a cross that takes place at a scheduled time. The goal is to aggregate as much flow as possible for that cross, in order to yield a high execution rate. Most crossing systems, in contrast, operate on a continuous basis, with orders matching whenever contra-side flow shows up and is within specified parameters. Executions take place within the national best bid and offer, typically at the midpoint.
One of Goldman’s advantages is its footprint in the dark space. Goldman’s Sigma X continuous dark pool is the industry’s largest, with an average daily volume in recent months of 300 million shares. Sigma X’s average execution size is between 500 and 600 shares. X-Cross executions take place within Sigma X.
However, the block space is challenging. ITG’s POSIT, Liquidnet, Pipeline, BIDS Trading, Pulse Trading, Aqua Equities and several others already operate on that turf. The first three saw their collective share of consolidated volume decline almost 40 percent in September and October, when the market became extremely volatile, compared to their average in the previous eight months, according to research firm TABB Group. BIDS hasn’t yet managed to capture the block imagination, but still expects to once more buyside firms are connected to the platform. Other block wannabes haven’t been able to build significant volume this year.
NYSE Euronext also recently finalized plans to offer New York Block Exchange, a continuous dark pool within its Big Board market, through a joint venture with BIDS. The NYBX is expected to launch in early 2009, pending regulatory approval. Meanwhile, Nasdaq, like ITG, has a series of scheduled intraday crosses available to orders of all sizes. So far, that product doesn’t appear to have drawn much volume.
Now, Goldman has entered the fray with a product aimed at setting it apart from the pack. X-Cross is a single scheduled cross that takes place at 10:30 a.m. The firm plans to add another cross in the afternoon, but hasn’t yet homed in on the time of that cross.
Dave Johnsen, head of Sigma X product development, said he expects X-Cross to pull together order flow residing in the large “Goldman Sachs family of electronic passive liquidity.” By offering X-Cross only twice a day, Goldman hopes to “de-fragment the market” at those times, thereby facilitating larger executions, Johnsen said. Traders will soon also be able to specify minimum execution sizes, to avoid small prints.
However, a point-in-time cross appears to run counter to the current dark-pool trend that emphasizes the continuous market. ITG, the king of scheduled crossing, is now up to 10 intraday crosses, including a 1 p.m. Power Match that’s only for blocks. Pushed to satisfy customers who didn’t want to wait around for the next cross, ITG in 2002 also launched continuous crossing through POSIT Now.
Chris Heckman, a managing director at ITG, points out that the dark pool space is a magnet for big ambitions that often aren’t borne out. “Recent attempts at launching point-in-time matches have faced difficulty in building critical mass,” Heckman told Traders Magazine. “ITG has successfully supported its crossing offering for over 20 years. In today’s volatile environment, clients demand meaningful results from these new venues.”
Goldman is counting on a variety of flow to head into its 10:30 a.m. cross. This includes the parent orders that are put into algorithms, resting orders in Sigma X and orders specified for X-Cross via REDIPlus and FIX. In addition, Morgan Stanley, UBS and Fidelity orders that already have access to Sigma X will be able to execute in X-Cross.
Goldman also expects program traders to use X-Cross. To encourage that, portfolio baskets placed in X-Cross can have dollar-neutral and beta-neutral constraints around them, according to Nangalia. “X-Cross will offer the ability to set basket-level constraints, controlling exposure and managing execution risk for portfolio trading,” he said. Sector constraints may be added in the next version of X-Cross, which might be released a month or two from now. Still, program traders may require the ability to control more constraints to minimize the risks associated with executing components of a portfolio out of sync with other parts of the portfolio.
Goldman now also has the ability to arrange ad hoc crosses if market conditions warrant that, or if, for instance, a large customer has a big portfolio rebalance. If a news event occurs, Goldman could “have a cross on the fly within 15 minutes,” Nangalia said. For these ad hoc crosses, the broker would alert customers through the latest version of REDIPlus. Johnsen added that GSET would also send out automated emails or IMs to apprise customers of the upcoming cross.
The big broker is contemplating additional types of crosses within Sigma X. These include a possible morning benchmark cross that would match up full-day volume-weighted-average-price orders. The trading price would be determined at the end of the day. Another idea under discussion is a morning cross that would give customers that day’s closing price for the stock.
