Operating an ATS in todays market structure is a challenging proposition amid the changing market regulatory environment. Jonathan Clark, Chief Executive Officer of ATS Luminex, recently sat down with Traders Magazines editor John DAntona and discussed several topics ranging from what the buy-side wants to order protection to the regulatory landscape.
Traders Magazine: What are the most important issues facing the buy side? What do they want? Liquidity? Transparency? Protection from predatory trading? How important is block trading?
Jonathan Clark: They want liquidity, but in a safe environment. Blocks are imperative to large institutional traders who need to buy and sell large amounts of stock; its even more important to trade those positions with minimal impact and information leakage.
Not coincidentally, these are the concerns that Luminex was set up to address. With block trading being so important to the buy side, we think Luminex is one of if not the best places to meet that need. As of August 2017, the most recent month for which there is data available, Luminex is now the leading ATS by average trade size in all three block trading categories that FINRA tracks.
Now, I also realize many of our clients want to rest their orders in many places at once, and thats fine. But we say if thats the case, try to incorporate Luminex into your workflow. When you get a hit at Luminex, you know its 100% buy side natural liquidity.
Traders Magazine: Is the buyside happier/more comfortable trading amongst itself, with no brokers?
Clark: Everything we see and hear suggests they are thrilled with the experience they are receiving at Luminex, where the buy side is only trading with itself. The reaction we hear is excitement. Now, why are they happy with it? Theyre happy because they know their execution was clean and safe, and they just saved their clients a lot of money.
Thats because not only does Luminex help our subscribers achieve best execution for their shareholders and investors by executing large block trades with minimal market impact, we also offer what I believe is the lowest commission rate of any block execution platform out there. And to your point, there are no brokers involved in trading at Luminex. Luminex doesnt have a trading desk or a prop desk. We dont make markets or have brokers or traders. Our clients know that Luminex doesnt have the potential conflicts that some venues have, which makes them more comfortable trading at Luminex.
Traders Magazine: And the safety comes from it being the buy side only?
Clark: I think so. One hundred percent of our clients are buy-side participants, and we have even gone so far as to work with them so we can better understand their business models and what their specific block trading needs will be. So, we are confident that all of our subscribers want the same thing: the opportunity to trade blocks. That means theres no HFT in our pool, no short term statistical arbitrage or proprietary trading. While those sorts of participants can provide liquidity to the overall marketplace, they dont typically help in the block trading arena that Luminex is solely focused on. Furthermore, we believe our clients gain added comfort knowing they will only interact with the 180 subscribers listed on our website, so there are no surprises.
I think our clients also appreciate that our business is not motivated by profit – we are really trying to be the buy sides block trading utility. We have to keep the lights on of course, but we return no profits to our investors and our model is to reinvest any excess cash flow into delivering continued improvements to our platform and to our clients trading performance. Ultimately, when a client trades at Luminex, they are preserving alpha for their clients, and what better feeling is there than that?
Traders Magazine: What is the buy sides leading regulatory concern? And whats your leading regulatory concern as a venue operator?
Clark: To your point, I dont want to say that MiFID II, which is nearing implementation. Its interesting though, that many of the bigger firms have made their decisions regarding the new regulatory regime and still many of the smaller firms are committed to wait-and-see. The euphoria has just about passed, and is being replaced with fatigue. That said, we do think there could be some positive impact to our platform, because MiFID II is about transparency and raising the bar on Best Execution, which should only help a venue like ours.
Beyond that, the Consolidated Audit Trail is on the horizon, and well see what happens there. Will there continue to be a big push to get it in place quickly? There are still a number of important gaps in the technical specifications that firms are supposed to design to. I wouldnt be surprised if it is delayed a bit based on the cybersecurity concerns in the wake of the SEC and Equifax hacks, and because of the overall size and scope of the enterprise.
I havent spent much time talking about the Access Fee Pilot. It doesnt really impact Luminex because we dont route out, but the drum beat is getting louder for a pilot program and I wouldnt be shocked to see something happen on this front down the road.
For us at Luminex, our biggest regulatory concern would be that unnecessary regulation could stifle innovation, hampering the launches and maintenance of innovative small companies like ours. ATSs like ours are already heavily regulated by the SEC and by FINRA. Id encourage regulators to do their best to ensure that any new regulation in this space isnt so burdensome that it stifles competition, which benefits all investors. To that end we were very happy to see Brett Redfearn named as the director of the Trading and Markets division, as we think he understands that balancing act well.
Traders Magazine: Describe Luminexs growth plans for the future.
Clark: We are very pleased with our year-over-year growth and clients are really pleased with their average execution amounts; they just want to do more of it! So, we made a decision recently to allow clients to submit fully conditional orders to Luminex, which means they will no longer be required to route us an order with a firm quantity component that requires a trader to trade whenever they get an invitation to trade. We believe this gives traders the optionality they are looking for when seeking block liquidity. We think this will increase the amount of orders we receive on a daily basis, leading to higher hit rates, more shares traded and yes, more preserved alpha for our clients shareholders.
We get a lot of questions on what Luminex will do next and whether we could please start a venue in Europe or start trading other products. We want to keep our eye on the ball of becoming the premier U.S. destination for block trading in NMS equities before we start to consider looking toward what comes next.
Is it difficult operating an ATS in todays market structure?
Clark: I have no doubt running a traditional ATS is difficult given the market fragmentation and the myriad of cross connects and complexities of broker dealer access. Fortunately for a platform like ours, its much simpler because we are only after one thing: trading blocks. Because we dont have broker access and we dont route out, we dont have nearly the amount of complications that the other 40 or so ATSs have.
But dont get me wrong: there is a tremendous amount of technology and human capital at work behind the Luminex platform. Maintaining a stable and effective platform on a daily basis requires a team effort, and for that I am extremely grateful to our team and our vendors, working tirelessly every day to ensure thats what we provide to our clients.
