Alternative Trading Systems Hunt for New Liquidity

Terry Flanagan

Operators of alternative trading systems are developing new techniques for expanding the pool of liquidity available to their institutional customers by allowing them to interact safely with dealer order flow.

Institutional asset managers have historically shied away from posting block-sized orders on regulated exchanges out of fear that electronic market makers will pick off their order flow and thereby cause their orders to be executed at an inferior price.

Citigroup’s newly-launched dark pool, Citi Cross, eliminates this risk by virtue of a new matching engine which “levels the playing field in terms of market micro-structure, and thereby affords a wide range of constituents the ability to interact in an even manner,” said Hannes Greim, head of Citi Cross ATS.

The ATS allows a wide range of clients the opportunity to interact with Citi’s various sources of liquidity. “The general idea behind Citi Cross is to bring together historically eschewed flows of liquidity, thus reducing fragmentation,” said Greim.

Also in the equities arena, Bloomberg’s BPool offers a centralized, active and diverse marketplace for traders to efficiently trade large blocks while giving traders the ability to monitor and control their orders from order-entry to execution.

“Because of the types of firms that use Bloomberg’s equities trading platforms, such as niche or boutique brokerage firms and long-only fund managers, the potential liquidity pool is very unique,” said Jim White, global head of operations at Bloomberg BPool.

By enabling institutional traders to interact with block-size liquidity on Bloomberg’s equity trading platforms and match orders at Bids Trading, a U.S. block trading venue, BPool is intended to help the buy side source equity liquidity in an increasingly fragmented market structure.

“BPool provides access to liquidity that a trader might not otherwise find in another crossing network,” White said.

Citi’s new ATS is the first dark pool to leverage an “even allocation matching algorithm” to fill orders on a per-participant basis, thus abandoning the price-time priority and pro-rata conventions, according to the company.

“Citi Cross levels the playing field, affording a low latency platform with commonality in how price improvement is shared across all market participants,” said Dan Keegan, global head of cash equities at Citi, in a statement.

Citi Cross offers an alternative to the “latency arms race” by removing the notion of queue position, Greim said.

Citi’s existing clients will now have the opportunity to interact with a wider variety of trading styles on a venue that, by virtue of its unique crossing engine, mitigates some of the micro-structure advantages inherent in price-time priority systems, which some have avoided for that reason.

“Those more active trading styles can represent a valuable source of liquidity, so the introduction of a venue that removes these incompatibilities is generating a benefit to both ends of the spectrum,” Greim said.

For those more active constituents, Citi Cross presents an opportunity to interact with retail and institutional flows that they have previously not had access to, Greim said.

Buy-side focused block trading broker Liquidnet Canada, meanwhile, is opening up its trading venue to registered broker-dealers, in an effort to offer more liquidity for its core institutional customers.

Dark trading is now roughly 7% of total daily market volume in Canada, up from 2.2% in 2011.

One of the reasons why dark pool volumes in Canada are so low is the existence of broker preferencing, an internalization practice that allows incoming orders to a trading venue to match with other orders from the same dealer ahead of similarly priced orders from other dealers, without concern for time priority.

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