NYSE Euronext’s Jim Ross on the Business of Crossing

Jim Ross at NYSE Euronext thinks dark pools have come full circle. Crossing systems were an alternative to the exchanges, but now, in his view, a crossing platform within an exchange is the best “alternative to the alternatives.”

In the Q&A below, Ross, the head of MatchPoint, the exchange’s point-in-time crossing platform, argues that dark pools aren’t as revolutionary nowadays as they once were. He suggests that exchanges, confronted with competition, have responded and become more innovative.

MatchPoint exists in the midst of the New York Stock Exchange’s continuous market. It executes all stocks, not just Big Board-listed names, and is intended for portfolios and single stocks. It runs crosses seven times intraday and once after the close. Nasdaq also has an intraday and post-close crossing platform for stocks that rolled out in 2007.

To be sure, neither exchange appears to have gained much traction with its crossing system. Nasdaq doesn’t disclose its executed volume in the Nasdaq Crossing Network. NYSE’s MatchPoint is currently trading 30,000 to 50,000 shares daily, according to Ross, but he predicts the platform will grow as more firms connect. MatchPoint launched its intraday crosses last September but only began actively trading in January. (The 4:45 p.m. after-hours cross launched in January 2008). MatchPoint is for NYSE members but is also available to nonmembers via sponsorship or direct market access through member firms.

Ross joined NYSE Euronext in 2006 when the exchange operator bought MatchPoint Trading, the company he had founded the previous year. Ross had worked at Instinet since 1989, running its global crosses business. He was operating Instinet’s after-hours cross on June 13, 1991, the day NYSE launched its first after-hours crossing session, and recalls worrying that it would cut into his business. That didn’t happen. Now on the other side of the fence, Ross makes the case that the New York can build a strong crossing business, both intraday and after-hours, for member firms and their wide range of customers. Traders Magazine’s Nina Mehta spoke with him in late March.

TM: What’s the benefit of MatchPoint over other dark pools and point-in-time crosses?
JR: We’re seeing the emergence of the exchange as the full expression of the ATS revolution. Alternative trading systems generated innovative ideas. The exchange facility is where these brilliant concepts are evolving. The exchange facility is the perfect neutral environment for these offerings to be brought into the market mainstream.

TM: For users, what’s the benefit of an exchange doing this?
JR: ATSs are segmented and exclusive. There are costs associated with that. People can’t find executions unless they string the order out over a period of time, so there’s a delay in executing the investment decision. Dark pools contribute to a fragmented, disunited universe that foments liquidity dislocation and drags out the ability to find blocks.

There’s also no longer much innovation in the ATS industry that’s really impactful. What we’re doing will bring some formality and control and centralization of the dark liquidity now hurting investors and investment managers.

TM: Yet there are many ATSs that have clever market structures designed to attract clients with a lot of liquidity and execute their orders with minimal market impact.
JR: Opaque or pseudo-opaque ATSs are commercially self-interested rather than focused on solving problems involving implicit transaction costs. That’s not what this revolution has been about. It’s been about reducing transaction costs because transaction costs reduce performance. It’s ironic that the NYSE is more open and inclusive than the ATS industry, which is more clubbish and isolated–like the NYSE of old.

We need a more centralized environment now. That’s why MatchPoint in an exchange facility is critical in reaping the disjointed liquidity that’s out there. It’s an alternative to the alternatives.

TM: So dark isn’t always good.
JR: The ATS model is free-form and flawed. I think it needs to be reformed. We print our executions on the tape with our identifier. For us, it’s critical that we have transparency on the tape. Every print on the TRF should be identified back to the source of the execution. I don’t believe in hiding in plain site. It defies the logic of openness and fairness in our markets. It’s about post-trade disclosure and transparency.

TM: Transparency is important so people can see what traded when. How much are you executing every day?
JR: We’re averaging about 30,000 to 50,000 shares. I can’t say we’re doing a lot yet, but we’re building something special. I expect this to grow as more firms get connected, so maybe by the end of this month it will be 40,000 to 60,000 shares, and it will grow from there. We don’t shadow the New York’s book or piggyback off other liquidity. The goal is to bring flow back to the New York rather than take flow off the floor and bring it to MatchPoint.

TM: So who uses the MatchPoint crosses and why?
JR: Program desks focus on the crossing sessions. MatchPoint is designed for portfolios, and no exchange offers what we do for portfolio traders. They may have a book that’s heavy one way or the other, and they can use the crosses to balance their book, fund liquidations, etc. They can use cash constraints and limit orders and minimum sizes. We also get orders from algorithms and cash block desks. Most of our volume is occurring intraday. After hours, we have the same types of customers except for algos.

TM: Tell me briefly how the internal matching works.
JR: Member firms that send in order flow can open this up to their customers. Their customers can cross flow internally first, if the broker allows that. This is done by mneumonic. Some member firms have a single mneumonic. Others have different ones for each desk or client. Internalized orders execute for free, while other executions are 15 cents per 100 shares. So far 67 member firms are authorized and permissioned into MatchPoint. They have more than 800 menumonics, and in any cross 10 or 15 participants send us orders.

TM: Are traders transacting lists concerned about different things during the day than they are after the close?
JR: There’s a different dynamic intraday. Portfolio managers, indexers and quants who are trading baskets want to control how the basket is moving through the market. Since there’s less capital commitment available, the portfolio-based community is concerned about the reactive nature of the market. We’re an informationless, passive environment. We don’t send out indications of interest to other dark pools and we have no route-out capability.

We aggregate liquidity at a single point in time. Our markets are a frenetic, disconnected liquidity pool that’s been fractured by millisecond and nanosecond trading and by the multiplicity of venues. There are 25,200 seconds in a trading day. We trade only seven times during the day. What a call market brings to the table is a passive reassembly of that liquidity at particular points in time. This is a passive, conservative environment.

TM: But MatchPoint is not a call auction. There’s no price discovery.
JR: It’s a call-market approach to aggregating interest at a single point in time. Having a point-in-time capability in a continuous world is important. It’s the same benefit investors get with ITG’s POSIT Match and Instinet’s VWAP cross.

TM: What is the benefit for them?
JR: There’s less information leakage, slippage and gaming. You can’t ping a cross to see if there’s liquidity there. Smaller orders can also be combined to execute against a bigger order. This avoids the ships passing in the night phenomenon.

TM: Does market volatility impact your crossing?
JR: We’ve been actively trading intraday for two months. There’s less volume at 9:45 a.m and 10 a.m., although we trade in every match. The trend is that volume increases during the day. Our largest matches are at 1 p.m., 2 p.m. and 3 p.m. But we’re still in our infancy. We’ll be more affected by volatile markets. Others that have been around longer will weather volatility and market drama without seeing ebbs and flows in their liquidity. But you never know when there will be more volume in a cross. Some portfolios are bid out in the early afternoon, so that flow could come in suddenly.

TM: What’s the breakdown in NYSE vs. non-NYSE names?
JR: We’re about portfolio crossing, so it’s NYSE as well as Nasdaq, Amex and Arca names. We may get 2,700 issues in a day but trade only 50 or 100. Our executions are about 60/40 NYSE to non-NYSE names. Most orders are in the 400-to-800-share range, and the average execution size is 500 to 600 shares. We’re pressing for a breadth of orders.

TM: Do you think dark pools should be required to publish their market share stats monthly?
JR: Yes. ATS operators should embrace this. At a minimum, this is the right thing to do. It’s no special privilege to hide in plain sight. The dark pools are doing 8 percent to 9 percent of the consolidated volume. That’s not nothing. Investors should be able to see where their flow is going and how it’s being transacted. It’s also less effective to do transaction cost analysis without that information.

TM: Do you see other advantages to running a crossing platform at an exchange?
JR: The anti-gaming protocols are whimsical at dark pools. As an exchange, we control, police, surveil and enforce our market. We have rules. There’s regulatory oversight and enforcement at exchanges–and it’s independent. An ATS is the player and the referee. An enforcement action by an exchange also has much more profound implications for a broker-dealer than a firm being put into a penalty box by a dark pool.

I think it’s time to get back to basics. Fragmentation increases transaction costs because the delay in getting executions increases. Now is a time of renaissance for exchanges. Exchanges are finding their particular purpose and reasserting themselves. There’s a need for a central hub.