NYSE and BIDS Trading Scan for Blocks in Light and Dark Pools
A new block-trading venue launched by the New York Stock Exchange that links BIDS Trading’s dark liquidity with the NYSE’s public, reserve and hidden order flow could boost the Big Board’s share of large orders.
But brokers and institutions still need to connect to the venue, New York Block Exchange, which launched Jan. 29. Further, they need to be assured that certain order types work on the venue, known as NYBX.
“You have to have a system up and running before you’ll get a specific user to pay specific attention to your system,” Tim Mahoney, CEO of BIDS Trading, tells Advanced Trading. (View AT's exclusive interview with Mahoney in which he shares details of the joint venture
Operated as a facility of the NYSE, NYBX is a joint venture between NYSE Euronext and BIDS Holdings, an alternative trading system (ATS) owned by 11 of the largest broker-dealers.
“The unique aspect of [the venture] is linking the exchange to an independent dark pool," says Larry Tabb, cofounder and CEO of TABB Group.
While a lot of dark pools are connected to each other, "The way they are connected here is a little bit different," he continues. "They’re not trying just to match up dark flow. It’s not all the algorithms linking the NYSE and BIDS together. It’s not just the streaming order flow washing through BIDS’ order book. ... This is a way to link together reserve flow and hidden order flow, which tends to be bigger flow."
The deal is also part of a push by the NYSE to bring back block trades to the exchange, Tabb adds. In the 1980s and '90s, block trades of more than 10,000 shares comprised more than 50 percent of the NYSE’s volume. “They were matched upstairs and crossed on the floor,” notes Tabb.
In recent years, however, as the average order size shrank to 200 shares, institutions have flocked to dark pools to seek anonymity and minimize the risk of moving the market. Today block trades comprise about 23 percent of the NYSE’s volume, according to published reports.
Linking to BIDS' dark liquidity "is a way to increase the fill rates on the NYSE, encourage people to post more orders and to post larger orders, and also to create more block liquidity,” says Joe Mecane, EVP for U.S. markets at NYSE Euronext.
One way in which NYBX is different from traditional dark pools is that “most dark pools are semi-insulated," Mecane says. "They tend to transact within their own pool, though there is some activity between then,” he acknowledges.
“Second, they tend to be focused on the inside price and at the midpoint," Mecane adds. "Those two factors make it harder to actually line up the two sides of the trade."
Instead of executing trades at the midpoint or at the inside price, NYBX aggregates liquidity across multiple price points, Mecane continues, allowing interested parties to fill blocks across several price points.
For example, if there were an order to buy 20,000 shares at $10.02, and the NYSE has sell orders of 10,000 shares at $10 and another 10,000 at $10.02, NYBX would aggregate the two sell orders in order to fill the buy order, Mecane explains. However, NYBX would need to fulfill its obligations under Reg NMS first, he stresses, meaning NYBX must take out the best prices available on other exchanges before it can print at any price level outside of the prevailing market price. 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
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