NYSE Euronext Develops Dark Pool for Crossing Portfolios

With dark pools gaining traction among institutions seeking leak-proof matches, one of the world's largest liquidity pools is venturing into the crossing network space. By the end of this summer, NYSE Euronext is expected to launch NYSE MatchPoint - a point-in-time benchmark crossing-network geared to large index funds and mutual funds looking to matching portfolios of stocks.The move follows the rapid proliferation of dark pools accounting for as much as 12 percent of U.S. stock trading volume according to research by the TABB Group. The Nasdaq Stock Market launched an intraday cross in June, and also plans to roll out a continuous block crossing network by the end of the year.

According to Jim Ross, VP NYSE MatchPoint, the exchange is wakening to the value proposition that choices are important in its offering. More importantly, he argues that exchanges can offer something that ATSs cannot - neutrality and a robust regulatory and surveillance infrastructure. And whereas other ATSs have taken a more inclusive approach, mentioning Liquidnet's focus on buy-side to buy-side trading), "The concept of the exchange is to be more inclusive and being a center stage for distribution and for everyone to participate on an equal basis," says Ross.

In stark contrast to the transparent and continuous electronic matching and auction environment that NYSE operates via Hybrid and the all-electronic trading platform NYSE Arca, NYSE MatchPoint will be an opaque, call-market that will initially match orders after the close of trading at 4:45 p.m. Once that match is up and running, NYSE MatchPoint will carry out a full schedule of intraday matches starting at 9:45 a.m. and then add on hourly matches from 10 a.m. through 3:00 p.m.

While there are many flavors of crossing networks, NYSE Euronext is aiming higher up the food chain at the more complex, portfolio-based orders. "Everyone on the block desk ignores the fact that if you go further up the food chain, the block comes from a basket or portfolio of trades," says Ross in an interview at the exchange's offices in July. "They're broken up not because that's the best way to trade it. They're broken up because we haven't addressed the facility of being able to trade the block or the portfolio," insists Ross.

It's hard to find a more passionate champion of institutional crossing networks than Ross, who sold his company, MatchPoint Technologies, to NYSE Euronext on July 17, 2006. "I'm like a kid in the candy store," says Ross.

A maven on market structure and market models, Ross worked at Instinet, a pioneer in electronic trading, for 14 years. He was there when Instinet launched the first crossing network, on Dec. 16, 1986. In a parallel development, Investment Technology (ITG) launched POSIT in May of 1987. Both systems were independently developed, yet they came out around the same time. "It came from the index and the portfolio-based institutions and the mutual fund community," says Ross. "The indexers had natural outflows and inflow that were just being passed back and forth. They knew they were out there, why couldn't they match up?" he asks.

After leaving Instinet, Ross developed the equity crossing technology with a partner, Platform Technologies, which did a lot of ECN/DMA development work including Hotspot FX. Together they were able to develop a platform that can run multiples crosses, from one to 500, at the same time, and could do different benchmarks, and ultimately could do different currencies. While the goal was not to obtain a broker-dealer license to run the crossing system, Ross found a partner in NYSE Arca which wanted to revamp its crossing capabilities. Though NYSE has had its own crossing session since 1991, it does not have basket trading capabilities.

For the past year, Ross and his team have been adapting the system to speak the language of NYSE, Arca and SIAC environment. For example, MatchPoint is able to draw in data from the various parts of NYSE Group, such as trade reporting, pricing symbology, user authorization and the FIX engine.

Operating as a facility of the NYSE, MatchPoint has set up four different server firms - one for disaster recovery, quality assurance, testing and one for development, which are mirrored servers. One difference from the NYSE crossing session is that NYSE MatchPoint will cover all NYSE, Nasdaq and regional stocks. It also is FIX-based and accessible via the Internet whereas orders enter the crossing session via SuperDot.

Obviously, NYSE MatchPoint is entering a crowded field of forty- something dark pools, populated by Liquidnet, ITG POSIT, Pipeline Trading and NYFIX Millennium as well as broker internalization engines and ATSs launched by brokers consortia like BIDS Trading and LeveL Alternative Trading System. On the exchange front, NYSE Euronext will go head-to-head with Nasdaq's crosses. Nasdaq operates crosses at the market open and close and launched an intraday cross in June. The electronic stock exchange is also planning to launch a continuous block-crossing network by the end of this year.

"Some people think we're competing with the ATSs, some with the other exchanges or with the transparent market," says Ross."We've chosen to put our focus more on the portfolio-based approach ... because I think we have a better sense on why people use crossing networks. While they focus on the single order (referring to Nasdaq), we acknowledge that there is a more complex liquidity pool out there that we want to accommodate," he says.

In the future, Ross is eyeing the potential for trading global portfolios in the same matching engine. "John Thain says we live in a global community and our trading systems should reflect that," says Ross referring to NYSE Euronext's CEO. For now, NYSE MatchPoint is focusing on the call market but Ross also doesn't rule out the idea of launching a continuous crossing model in the future.

"There are a number of different areas where we can enhance the process. Right now we need to focus on getting this product up and running so we can engage the product and expand it," he says.By the end of this summer, NYSE Euronext is expected to launch NYSE MatchPoint - a point-in-time benchmark crossing-network geared to large index funds and mutual funds looking to matching portfolios of stocks. The move follows the rapid proliferation of dark pools accounting for as much as 12 percent of U.S. stock trading volume according to research by the TABB Group. 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