Crossing Networks Attract New Entrants

With all the buzz around crossing networks as a means of searching for hidden liquidity, two new contenders are eyeing the space dominated by Liquidnet, POSIT and Pipeline Trading Systems.

In June, Stamford, Conn.-based NYFIX quietly launched NYFIX Natural - a buy-side-only messaging service that notifies institutions when there is a match in NYFIX Millennium, an alternative trading system (ATS) for finding hidden liquidity in listed stocks. "We've had some pretty good success with it," says Bob Gasser, CEO at NYFIX Millennium.

NYFIX Natural offers "an ability for the buy side to communicate with other buy sides as their natural interest in trading blocks," according to Gasser. For example, if a trader is a buyer of IBM and a match is found, a message is sent to the buy-side trader via Bloomberg, a buy-side order management system (OMS), or Ticker, NYFIX's own messaging application.

"We're notifying the buy-side clients and the trade occurs in Millennium," the CEO continues, adding that there is no negotiation between the contra sides. Instead, they automatically execute at the midpoint of the bid-ask spread, Gasser explains.

To prevent information leakage, the minimum trade size is based on the stock's index participation - 25,000, 10,000 or 5,000 shares. "You can either trade or you can ignore it," says Gasser, who notes that, unlike Liquidnet, NYFIX Natural does not read the OMS blotter. So far, NYFIX is making Natural available only to a "selective group of buy-side firms as well as hedge funds with $2 billion in assets or more," he adds.

Meanwhile, there is talk that New York Stock Exchange member firms would like to see the Big Board develop a crossing network as part of its new Hybrid system. One sell-side executive sees the potential for an NYSE crossing network as a reaction to the changing market structure, and the desire to reverse the average trade size (now 400 shares) and the decrease in block trading taking place on the NYSE. "Everyone wants to be in the crossing space because institutions want to cross bigger blocks of stocks," says Joe Gawronski, COO at Rosenblatt Securities, an institutional agency brokerage firm that is a member of the NYSE.

The Hybrid system has reserve and price discretion features of the broker-interest file - features in NYFIX, POSIT and Liquidnet, Gawronski notes. "If you have these features, that can possibly lead to a crossing network," he says. But, Gawronski stresses, though certain NYSE members have started talking about the possibility, nothing is set in stone yet.

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