Connecting to Alternative Execution Venues

Ivy Schmerken, Wall Street & Technology

With the proliferation of alternative electronic execution venues lining up to compete with the New York Stock Exchange and The Nasdaq Stock Market, connectivity to these new liquidity pools is not a topic that gets discussed much. But this week two of the new electronic marketplaces - one an ECN, the other a stock exchange - revealed new partnerships with electronic trading platforms.On Tuesday Kansas City-based BATS Trading said that Lava Trading announced it had added the "And the smart connectivity comes through the use of algorithms," he says. Cline points to Liquidnet's recent agreement to acquire Miletus Trading, an agency broker that creates quantitative strategies and algorithms for portfolio managers and buy-side traders as an example of the trend. "You're seeing a pairing of algorithmic providers with the alternative liquidity pools," observes Cline.

In the case of BATS partnering with RedSky Financial, a broker-dealer specializing in providing multi-asset trading to automated trading clients known as algorithmnic or black-box traders, BATS ECN was designed to offer high-speed anonymous algorithmic trading, noted Dave Cummings, CEO of BATS Trading, in the release. After slashing its fees for taking and adding liquidity, in a relatively short time, BATS has gone from 100 million to 200 million and now 300 million shares per day - it reported record daily volume of more than 300 million shares on Jan. 31. BATS accounted for more than 13 percent of Nasdaq-listed volume for each of the past eight trading sessions, the company said on Tuesday.

Equity trading departments on the buy- and sell-sides are no doubt exploring their connectivity options to the new equity execution venues. But with upwards of 30 alternative venues and so-called dark pools - matching systems that don't publish a quote - does one need to connect to every single venue? Can one rely on buy-side order management systems and EMSs to connect to every venue no matter how insignificant? Or is it okay to pick the venues that have the most volume so far?

That can be a dicey strategy since the new ECNs such as BATS are first building momentum and brand recognition while the dark pools are operating in the dark, so it's more difficult to know how they're doing. Yet, under Regulation NMS, which codified the definition of best execution more than in the past, the market centers (exchanges) are on the hook to route trades to the market displaying the best price.

Clearly, the alternative venues of dark pools are not going away. "They're here to stay," says Cline. And with that comes a new responsibility. As former President Ronald Reagan said, "Trust, but verify." Or in this case, question, but connect. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio