Fidelity Capital Markets Shines Light on Dark

Terry Flanagan

Buy-side traders are seeking information about the liquidity available on off-exchange trading venues in order to make intelligent choices about where to route orders.

“Our clients are progressing from just pure dark aggregation to packaging this tailored liquidity offerings from the different brokers into more targeted trading objectives across different parts of their desk,” Derrick Chan, senior vice president at Fidelity Centralized Electronic Trading, told Markets Media. “They are using custom-tailored liquidity from the different brokers to really create a more holistic and integrated experience.”

In 2012, Fidelity Capital Markets, the institutional trading division of Fidelity Investments, launched Block Liquidity Opportunity Cross, an execution venue focusing on block trades and an extension of the company’s CrossStream alternative trading system.

“We believed that there was a shift in the way that buy-side was asking the sell side to provide products to them,” said John Donahue, senior vice president and head of equities at Fidelity Capital Markets. “We thought at the time that the buy side would be asking for more transparency, more visibility into routing decisions and venue decisions.”

Derrick Chan, Fidelity Capital

Derrick Chan, Fidelity Capital

Fidelity reports that the average trade size for institutional investors in BLOX almost doubled in 2014, to more than 15,000 shares in the fourth quarter.

“‘The Street’ was very good at quoting broker-sponsored products, but not at providing transparency with respect to where executions were taking place, and what counterparties were on the other side of the trade. It was really difficult for the buy-side to navigate the waters of a venue selection and the potential information leakage and toxicity,” said Donahue. “We think that our thought process has been validated in the sense that when we look at our clients using the product today, we see a completely different experience with these clients as opposed to the old model.”

BLOX allows Fidelity’s institutional clients to leverage the liquidity of Fidelity’s retail brokerage business as well as other firms whose order flow is handled by Fidelity.

The primary business case for BLOX is to consolidate and enable all of Fidelity’s clients to interact and benefit from one another’s liquidity. Additionally, Fidelity offers its trading capabilities to address a key issue in the industry: that liquidity is being repackaged into multiple dark pools and order types, so the question for traders becomes one of deciding which combination of order type is appropriate for each dark pool. It has become an issue of managing information leakage as your orders get split up and sent out across multiple venues.

“The buy side is rightfully demanding from the Street more transparency into routing decisions, where they’re executing, the economics of the execution, the toxicity of the execution, what kind of access they’re getting, who they’re interacting with,” said Donahue. “If you think back two or three years ago, the clients that had that capability were the larger ones with their own quantitative staffs and their own proprietary systems that allowed them to fully understand the ramifications of their routing decisions.”

With the aid of platforms such as BLOX, the buy side has gained visibility into executions. “We know that they’re demanding more transparency and it’s only going to increase,” Donahue said. “We’re involved with these clients at a very deep level with regards to providing them the capability. The process is to actually get inside their execution and understand where they’re routing and why. Understand the ramifications of routing decisions, which we don’t really think that we were really able to give our clients prior to this product.”

When Fidelity consults with its clients, the main questions it gets are “Where do I go? Why do I go there? What can I expect when I do go there?”

“When you understand the individual venues, what’s in there, who you’re interacting with, and you provide that fact to your client and you allow your client to make an educated decision where they’re routing to, the conversation changes almost on the dime,” said Donahue. “The good liquidity will find you and you will find it. You need to stay away from the bad liquidity. That may mean skipping several venues because of the toxicity of the venue.”

Featured image by SkyLine/Dollar Photo Club

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