Goldman Sachs’ electronic trading group is adding functionality to its execution management system that allows customers with block orders to communicate their trading interest to other Goldman customers. In offering the new service, called Block Signals, Goldman joins a trend among broker-dealers operating dark pools to notify traders of potential execution opportunities through their pool.
“Block Signals is a messaging product squarely focused on blocks, said Rishi Nangalia, global head of business development at GSET. “These are peer-to-peer messages.” The firm is beta-testing the product now and is planning for a “soft launch” next month.
Nangalia stresses that Block Signals isn’t an indications-of-interest-type product. Some dark pools over the last year began sending out indications or alerts based on orders within their walls to engines or smart routers at other dark pools in the hunt for contra-side liquidity. The response of buyside clients to dark pools sending these alerts has been mixed.
Goldman’s Block Signals is different. It’s used solely within the REDIPlus community. GSET also knows who has contra-side liquidity since the orders are in REDIPlus. In addition, unlike dark pool IOIs, which typically go to other dark pools to tell those pools to send any existing contra-side orders to the original dark pool that sent the alert, Block Signals is sent to humans with knowledge of the full order size.
Block Signals is integrated with REDIPlus and Goldman’s Sigma X dark pool, and will be available to a “select set” of REDIPlus users, according to Nangalia. Those traders can use Block Signals to send “alerts” to other REDIPlus users with firm contra-side orders on their blotter. If an alert recipient responds, the execution takes place in Sigma X.
Block Signals is possible, Nangalia said, because “we own the front end and the [Sigma X] matching engine.” As a result, GSET has potential access to a vast amount of latent liquidity. The Goldman exec said he hopes Block Signals will eventually have about 500 users.
Traders can use Block Signals on an order-by-order basis. A trader who wants to signal those with contra-side orders puts his or her order into Sigma X and sends out the signals. Signal recipients get messaged that there’s a large executable order in Sigma X, Nangalia said. The recipients interested in an execution can put their block order, or a block-size chunk of that larger order, into Sigma X. The execution takes place automatically, based on the limit prices of the two traders. The price is always within the national best bid and offer.
The community of Block Signals users will include institutions, hedge funds and broker-dealers. They must meet “certain quality criteria,” Nangalia said. GSET controls who receives the signals. Block Signals users cannot segment the group of alert recipients for their orders to, for instance, just the buyside. “It’s up to our engine to decide which trades to match,” Nangalia said. “We want the order characteristics to be the driving factor, not client profiling.”
Block Signals has minimum execution quantities to prevent clients from fishing for information with smaller orders. For a large-cap stock, the minimum is 25,000 shares. For a mid-cap, it’s 10,000 shares. Small-caps have a 5,000-share floor. Both senders and receivers can also specify higher minimum executable quantities.
The goal is to get traders with block-size orders to open up if there’s a chance that doing so could result in an execution. But to do this, Goldman must prevent signal recipients from using the information to their advantage. “Signals are sent only to the small community that’s relevant,” Nangalia said. “Responding to an order generates more signals” in the future. The aim is that that will encourage self-policing by customers who want to continue to receive Block Signals.
But Goldman will do its own policing as well. “Traders can’t dissociate intent from action,” Nangalia said. “We will monitor for people loading up names with the intent to get signals but not act on them.” GSET will track the behavior and performance of community members, “such as how often they receive a signal, how they respond, and what the hit rate is,” Nangalia said. Customers who aren’t using Block Signals to effect blocks will lose their access to the signals.
Block Signals follows on the heels of X-Cross, a block crossing product GSET launched in MONTH. X-Cross is a point-in-time cross that takes place at 10:30 a.m. In the second quarter, the firm will probably add another two intraday crossing sessions. But unlike X-Cross, which is open to all REDIPlus users, Block Signals isn’t. “It’s more the premium users capable of doing blocks,” Nangalia said.
