In a move to bring together exclusive retail and institutional dark pools of liquidity in order to increase the likelihood of matching larger orders, Lehman Brothers and Fidelity Brokerage Co. have established a direct link between their respective alternative trading systems (ATSs). A FIX connection between Lehman's Liquidity Center Cross (LCX) and Fidelity's CrossStream platforms will enable traders to place orders on either firm's matching engine and cross with both liquidity pools while still limiting market impact.
"Traditionally, our strength is on the institutional liquidity side -- larger, chunky liquidity -- program trading and algo trading," explains Michael Bleich, head of liquidity strategy at Lehman Brothers. "We're excited about this linkage because in addition to the institutional liquidity that Fidelity brings to the table, they bring a rich, deep pool of retail liquidity. We think the two liquidity pools will complement each other nicely."
According to Bill Baxter, senior vice president and head of equity at Fidelity Capital Markets Services, the link will provide a good strategic fit and benefit customers of both companies. "Our customers benefit from the ability to link between the two ATSs," he says. "We'll be able to offer customers faster execution at a better price by having access to a larger liquidity pool with the two joined entities."
While both companies also are involved in the LeveL ATS, it remains a separate pool of liquidity in which each firm's brokers can place liquidity and interact. The new linkage is exclusive between the two companies. "This is the first time we've announced a bilateral arrangement like this," says Baxter.
Lehman's Bleich adds that some liquidity might be reflected in LeveL ATS, but not all of it. However, the Fidelity linkage will allow access to all liquidity. "It's a different structure trying to address a similar problem," says Bleich.
The link with Fidelity is yet another way to leverage the growing number of dark liquidity pools in a changing market environment, Bleich continues. "We're in a phase of experimentation with different methods of linking together emerging liquidity pools and unlocking the value," says Bleich. "There are a variety of ways to do this -- LeveL is one and the direct Fidelity linkage is one."
Connecting the Dots
And the ATS linking doesn't stop there. According to Bleich, Lehman Brothers already is in talks and has tentative agreements with other brokerages for similar linkages. "It's hard to say where this is going and what the outcome will be," he says. "We're competitors, but there's value we can deliver to customers by working together."
Baxter says that Fidelity has no definitive plans to link to any other institutional investors at this point, but adds that in general, "We are constantly evaluating other firms and liquidity pools."