New Sell-Side Block Trading Venue to Launch in Europe
A new type of trading venue is set to launch, allowing sell-side firms to execute block trades anonymously using social-networking technology.
Called Squawker, the London-based platform, which hopes to go live from the first quarter of 2013, says it will be “neither a traditional trading exchange, nor dark pool, nor a multilateral trading facility” but promises to help sell-side firms find liquidity, negotiate and trade large blocks of shares without causing ‘information leakage’ and exposing the trades to predatory high-frequency trading firms who would thus move the market against such orders.
“Squawker is a secure forum, based on anonymous social-networking technology, where the human trader can find liquidity and personally interact, negotiate and build on block trades with their trading counterparties,” Christopher Gregory, co-founder and chief executive of Squawker, told Markets Media.
“Trades execute with all the efficiencies of electronic trade capture, reporting, audit trail, controls and downstream processing.
Gregory says that Squawker will be targeting the “10%-15% of pan-European equity trading that is still negotiated predominantly over the telephone”.
Buy-side institutions usually use dark pools, operated by broker-dealers, to trade large blocks anonymously but sell-side firms trading large blocks of shares usually do so via inter-dealer brokers. But Squawker aims to cut these costs by doing away with the financial middleman by allowing firms to trade securely and anonymously on an electronic basis.
“Order book trading has reduced costs and improved efficiencies for smaller orders,” said Gregory. “Larger-sized trades remain difficult to trade both on and off exchange. Sell-side traders currently have two choices: risk the market and opportunity costs of slicing and dicing block trades and executing them through either lit or dark order books, or trade via an interdealer broker, without the benefits of electronic transaction processing, compliance monitoring or audit trail.
“The time has come for a new type of trading venue, one that eliminates algorithmic flow and combines personal interaction and behavior with the efficiencies of electronic processing. In so doing, the financial markets will finally have an electronic venue free of toxicity.”
Gregory says that Squawker, which he says will be fully MiFID-compliant, will not be competing against the likes of Liquidnet, a buy-side focused block trading broker, or the order books of lit venues such as Chi-X Europe, the largest of the pan-European multilateral trading facilities.
“The efficiency of the order books, in particular, has created this rump of trading that is still done over the phone,” said Gregory. “If it were going to go on to a Chi-X or a Liquidnet, it would have done so already.”
Market participants are divided over the rapid increase in high-frequency trading which now accounts for roughly 70% of equity trading in the U.S. and over 30% in Europe. Proponents of the practice say it lowers transaction costs and adds much needed liquidity while others, such as big institutional investors, are wary of HFT as they find it hard to execute block orders without high-frequency traders moving the market against them.
The rise of HFT is thus forcing more orders to non-lit venues. “The portion of trading that is carried out in the dark environment has grown in Europe this year and continues to do so,” Per Loven, head of international corporate strategy at Liquidnet Europe, told Markets Media.
But this is also beginning to cause problems for exchanges over price discovery.
For example, the Australian Securities Exchange, the country’s main bourse, recently revealed that total trades taking place through dark pools so far this year had been around 25% in Australia but had been as high as 43% at times. Nasdaq, the world’s second-largest exchange, has shown that when 40% of trading is conducted through dark pools the exchanges’ ability to act efficiently begins to deteriorate.
CEDX opened on 6 September, offering contracts on Cboe Europe single country and pan-European indices.
The MOU covers certain security-based swap dealers and participants.
Equity underwriting on European exchanges rose 70% in the first half.
The analysis is based on transactions publicly reported by 30 European APAs and venues.
A similar service is available on the BIDS platform in the US equity market.