Pipeline Trading Hits Volume Peak With Buy-Side Backing

With critical mass building from buy-side institutions, on Tuesday, Pipeline Trading, a continuous electronic block-trading marketplace, said it executed 17.3 million shares.

This surpasses its previous record of 14.8 million shares recorded on May 24, according to Pipeline Systems, a registered broker/dealer that operates Pipeline Trading, an alternative trading system (ATS).

"I think the main reason for their continued increases in matches is they've started to attain critical mass," says Kevin Connellan, director of equity trading at Northern Trust Global Investments, with $592 billion in assets under management, who uses Pipeline as well as Liquidnet, its anonymous block-trading competitor.

"The new users are finding that when they do a trade there that they're getting a good execution, plus, unlike some ATSs, it provides less opportunity for people to be gaming the system," says Connellan. According to Fred Federspiel, president and founder of Pipeline Systems, the firm has signed up 150 participants - two-thirds of which are buy-side institutions, while the remaining one-third are agency brokers.

"What's dominating the growth is acceptance of more and more users," says Federspiel. Pipeline had 30 customers when it launched the system on Sept. 9, 2004. "We just cracked the 150 north barrier. That's the thing that is driving volume growth," says Federspiel, noting that some firms wanted to see if the volume would head north or south after the launch, before joining in.

Robert Hegarty, vice president of the securities and investments practice at TowerGroup, agrees that Pipeline is showing good traction. "In less than a year, they've had a peak day of 17 million shares, I think that's a pretty neat accomplishment."

But Hegarty, who follows block-trading systems, cautions that "we're not talking about average daily shares. We're talking about a peak day and sometimes those peak days may be few and far between," he says. "Peak doesn't tell you what they are doing on the average," adds Hegarty.

Liquidnet's average daily volume for U.S. equity trades hit a record 27.5 million shares for the first quarter ending March 31, which is a 20 percent increase over the last quarter of 2004 and a 60 percent increase from the first quarter a year ago, according to the release.

A key difference is that Liquidnet is a buy-side-only matching system, which doesn't let in brokers, while Pipeline allows brokers to participate.

"It's a different model; they are letting in both sides. They also have different engagement models," says Hegarty, adding, "I can see both sides of this argument working. On the one hand, Liquidnet limits their clients to those that behave. Pipeline is taking a little more open policy," he says.

Another difference is that Liquidnet's peer-to-peer middleware scans its customers' order management systems (OMS) to find matches based on indications. If Liquidnet finds a match during this so-called passive mode, the system notifies the two anonymous counterparties who are asked to put in an order and enter a negotiation. But if someone is trying to take advantage of the system, this person could cancel the order and walk away with information.

Federspiel says Pipeline "doesn't look at indications. It matches orders only and that's the appeal to the system. When the order is matched up, the trade is done." Participants must come in ready to trade 100,000 shares for liquid names. For most names it's a 25,000-share threshold, and, for the very illiquid stocks, the minimum is 10,000 shares, he says.

According to Connellan, Pipeline "has two main selling points: a very easy user interface that is extremely user friendly, and of all the competitors, it has the least opportunity for gaming. "Therefore their continued success rate is encouraging more people to join their network," says the buy-side trader.

But Hegarty says, "Every system can be gamed. And it's a real question of what sort of policies are in place, what sort of monitoring, what sort of self policing is taking place to limit the amount of gaming," he warns. 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