While 2013 did not see the roiling turmoil of 2012, with its elections, Occupy Wall Street protests and cascade of bad news, this was far from a boring year. In fact, 2013 was a year of contrasts. For every bit of good news-the Dow rebounded to its highest levels during the late summer and fall, and unemployment numbers continued to inch up-there was also a near-constant stream of worrying reports.
During a steady if muted economic recovery, Republicans in Congress decided to shut down the U.S. government for nearly a week and at a cost of $24 billion. Investment firms saw major profits and boasted record amounts of cash on hand, but still refused to hire back a portion of the workers they laid off in 2008. The Securities and Exchange Commission welcomed a new leader in Mary Jo White, and not only has she proved herself adept at handing out unprecedented fines, she is also forcing the guilty parties to admit their wrongdoing. Look no further than J.P. Morgan’s jaw-dropping $900 million in fines for the extravagances of a wayward trader known as the London Whale.
The buyside saw its power shift in its favor-but at a cost. While they are demanding more from their sellside counterparts, traders are keeping a tighter grip on their commission dollars in exchange for greater transparency and better research and services. With multiple markets, brokers and third-party firms providing the services that once only came from the sellside, the buyside is calling more of the shots. In fact, they even have their own dark pool, IEX.
Although 2012 introduced us to the term “trading glitch” with the spectacular meltdown of Knight Capital, those trading glitches quickly lost their exclusivity and became almost commonplace. Disruptive, certainly, but not nearly as unique as they once were. On the plus side, regulators are mulling new rules that will force investment firms and exchanges to test their systems and software. Even the players that drag their feet at every new regulatory proposal realize that their typical protests of vague and costly guidelines may not be heard. The fines are too high these days, as is the reputational risk.
In the following pages, the editors of Traders Magazine look back at the 10 trends and stories that shook the trading world. We examine the impact they had on the past 12 months and what role they may play in the coming year. This isn’t a trip through memory lane, but more of a look at the road ahead for the men and women on the trading floor. Enjoy.
One-Touch Trading Gains Momentum
By John D’Antona Jr.
The institutional equities business is moving to a one-touch coverage model, but the buyside’s participation is optional.
That’s the message the majority of the bulge bracket brokers are sending out, as they attempt to maintain profitability in the current and extended low-commission, low-volume environment. However, in a concession to the buyside, switching to this single-point-of-contact trading desk is not mandatory and institutional traders can still trade with their favored high- or low-touch trading counterparts.
Brian Fagen, Deutsche Bank’s head of North American execution services, earlier this year told attendees at a TradeTech conference that this trend was indeed the way trading desks were going, according to conference-goers.
“You will see more clients moving toward coverage by fewer people rather than more,” Fagen said, “but the sellside will not force it on them. That would be a disaster.”
Fagen’s remarks come as the bulge bracket is starting to offer its clients the option of having a single individual or a group of traders covering both their high-touch and low-touch trading needs. Behind the move is the sellside’s need to cut costs, although there are advantages to convergence for the buyside, too.
Brokers’ commissions have fallen from $17.3 billion in 2009 to $12.7 billion in 2012, according to research consultancy Tabb Group. In that environment, something has to give, traders admit. Which means a single trader may start to take responsibility for some or all of a client’s automated and manual trading needs.
Five of the nine bulge bracket firms are implementing some variation on the model: Goldman, Morgan Stanley, Merrill Lynch, Citigroup and Deutsche Bank. Two of the firms-Credit Suisse and Barclays-have said they are not. The other two-UBS Securities and J.P. Morgan Securities-would not comment.
Still, the trend is a concern for many on the buyside who prefer to keep their electronic orders separate from their block orders. They fret over a loss of the anonymity they currently enjoy when trading with the bulge’s electronic departments.
“Consolidation is here,” said Craig Jensen, a principal and head trader at Armstrong Shaw Associates, a New Canaan, Conn.-based asset manager with $2.5 billion in equities. “It’s been here, and it’s ongoing. From when electronic trading first took off, it’s been a natural progression to where, in the end, there’s going to be overlap with cash trading.”
Every bulge shop that has spoken with Traders Magazine about the issue has emphasized their single-touch services are optional.
Still, brokers have made the point that it would not be irrational to combine the services of the high-touch sales trader with those of the low-touch electronic sales trader. The cash desk already trades electronically, as well as offering capital and block crossing services.
Matt Samelson, principal at industry consultancy Woodbine Associates, told Traders Magazine that while the debate surrounding “one-touch” has cooled somewhat from the super-hot topic it was when Traders Magazine wrote about it this past spring, it is still being discussed and implemented.
“Some firms have unilaterally decided to move in this direction-that is, certain firms have decided they are going to steer customers in a way where it is more economically viable to service them,” Samelson said. “Firms are still trying to get the model right, and this move to a single point of contact is still happening.”
Order Type Overload
By Peter Chapman
Are there really 2,000 exchange order types!?
Buyside traders fret about a lot of things. In the past year, they added the ever-expanding universe of exchange order types to their lists of worries.
“There’s an order type a minute being created,” Jennifer Setzenfand, an institutional trader and former chairman of the Security Traders Association, told Traders Magazine earlier this year.
The buyside has two complaints about order types. First, their sheer number adds undue complexity to the market. Second, some of them can be used by proprietary traders and market makers to the disadvantage of everyone else.
So how many are there? Apparently, it depends on the definition of “order type.”
BAT Holdings, operator of two stock exchanges, conducted an internal review and found it had at least 2,000 “unique order type combinations.”
Rosenblatt Securities, on the other hand, spent four months researching documents from all the industry’s exchanges and declared there to be only 252 “order types.” And those were based on only 36 archetypes, according to the broker’s 56-page report.
Rosenblatt concluded there was no conspiracy between exchanges and professional traders to create order types that hurt the buyside. But it did state that the proliferation of order types added to the complexities of the marketplace and that “undoubtedly creates opportunities for the savviest market participants.”
The exchanges say that they create new order types in response to customer demand. They note that all changes are made public through the regulatory process so must first be vetted by the Securities and Exchange Commission.
They are not adding new ones onto their rosters surreptitiously, they emphasize.
The various order types “allow people to trade in different ways in different time frames with different objectives,” BATS chief operating officer Chris Isaacson told Traders Magazine.
Driving the plethora of order types is good old-fashioned competition. To keep a large customer happy, the exchange operators will devise an order type just for him.
They’ll ask a firm what it needs, said David Polen, an executive with vendor Fidessa Group, and hear: “‘Well, if you tweak the infield fly rule, it will help my team.’ You say, ‘Oh, OK, you know what? I’ll tweak the infield fly rule. I want you to play in my stadium.'”
That process may be repeated several times with several different customers, Polen added.
Despite the chorus of complaints, the exchange operators have made no effort to cut back on the number of order types. Actually, they are still adding to the list.
As Trading Magazine was going to press, the New York Stock Exchange was proposing two new order types, the “Institutional Liquidity Order” and the “Oversize Liquidity Order.”
Presumably, these will appeal to the buyside, as they are intended to facilitate block trading.
Still, the buyside is vexed, so it recently asked the SEC to get involved. A group of traders from 37 buyside desks worked with brokers Bloomberg Tradebook to write a petition asking the SEC-among other things-to force the exchanges to be more forthcoming about their order matching processes.
For their part, the exchanges have taken steps to better clarify the complexities of their order types. Both Nasdaq OMX Group and Direct Edge have created audiovisual presentations for their websites that do just that.
Volume: Down and Downer
By Peter Chapman
It could have been worse.
Volume declined in 2013 by the smallest amount in the past four years.
For the 10 months through October, average daily volume clocked in at 6.2 billion shares. That was down from 6.5 billion shares, or 4.6 percent, the previous year.
By contrast, during the years 2012, 2011 and 2010, average daily volume declined by 16.7 percent, 8.2 percent and 13.3 percent, respectively.
Still, a decline is a decline.
Behind the sluggishness, according to analysts at Kissell Research Group, are higher, yet less volatile stock prices. The S&P 500 Index is up about 23 percent so far this year, while the CBOE Volatility Index, or VIX, is now down around 13-about as low as it gets.
As stock prices increase, investors-restrained by the amount of money they can throw into the market-will purchase fewer shares, Kissell noted in a recent report. And when stock prices don’t bounce around as much, investors find fewer investment opportunities, so they trade less often.
For the fourth quarter, Kissell was relatively upbeat. The research house was forecasting steady-as-she-goes volume for large caps as compared with the third quarter, and an uptick in small-cap volume.
“This is counter to typically fourth-quarter trends where markets often experience a reduction in volumes toward the end of the year due to the holiday season,” Kissell reported.
That may be good news for one small-cap trader who, earlier this year, lamented the plight of his kind in the pages of Traders Magazine. “Declining volumes, wide spreads and a lack of liquidity have made these issues a nightmare for any trader looking to execute an order of even moderate size,” wrote Dennis Dick, a trader with proprietary shop Bright Trading.
If volume is down, can commissions be far behind?
Institutional commission data isn’t available for 2013 yet, but anecdotal evidence suggests it is not trending up. Dennis Fox, head trader for Munder Capital Management of Birmingham, Mich., told Traders Magazine recently that buyside budgets were tight and that “as commission dollars are down, we are going to pay people less.”
The skinnier wallet is certainly making itself felt on the sellside. Larger brokers are consolidating their high- and low-touch desks. Smaller brokers are disappearing altogether or jettisoning their equities groups.
In June, Greenwich Associates reported that institutional commissions declined by 15 percent to $9.3 billion in the year that ended in February.
The survey shop reported that most major brokers were not expecting an upturn any time soon and were shaping their businesses around the $9 billion to $10 billion mark.
Knight Capital Moves
By Phil Albnius
If anyone needs further proof of the impact of a trading glitch, look no further than Knight Capital. In the 16 months since it suffered one of the most devastating technology malfunctions in the history of Wall Street, the once-respected Jersey City broker has been split up, sold and seen its top talent spread to the wind.
Wall Street has not seen such an exodus of top talent since the collapse of Bear Stearns and Lehman Brothers in 2008. Unlike in those spectacular flameouts, the CEO of Knight Capital fell on his sword. On July 3, the day after Knight Capital was purchased in a $1.8 billion deal by high-speed trading firm Getco, Knight CEO and chairman Tom Joyce sent an e-mail to staffers.
He wrote, “I take great pride in the fact that ‘legacy Knight’ is operating so well as it moves into KCG Holdings. And I am gratified that the values at the core of Knight’s DNA-client service, integrity and maintaining the highest standard of business ethics-will continue to be core values of KCG going forward.”
Knight Capital was known for its IT, but the day after a server went haywire and sent out excessive orders on Aug. 1, 2012, the losses and obligations swelled to more than $600 million. Knight Capital was effectively no more. To add insult to injury, the broker was forced to pay a $12 million settlement for its trading malfunction.
“Knight’s internal reviews were inadequate, its annual CEO certification for 2012 was defective, and its written description of its risk management controls was insufficient,” said the SEC.
In good news, several high-profile Knight Capital executives, traders and salespeople have found greener pastures-so much so that Traders Magazine’s “On the Move” section could effectively be called “Knight Moves.” Here’s a sample of where Knight’s talent has wound up:
Cantor Fitzgerald & Co. hired six ex-Knighters: a team of three market makers in exchange-traded funds-Reginald Browne, Eric Lichtenstein and Darren Taube-as well as Matthew Scorsune, Brad Kotler and Aaron Kehoe.
Former Knight sales trader Tom Fasulo joined institutional brokerage International Correspondent Trading in Jersey City, N.J., as a sales trader. Mike Lloyd, a seven-year Knight veteran, joined Janney Montgomery Scott’s equities group in New York as a sales trader.
Macquarie Group, the Australian financial services firm, scooped up former Knight head of sales Brandon Krieg as head of electronic execution in the U.S. He will oversee Macquarie’s relationship-building efforts with U.S. and European clients, as well as the firm’s capabilities in electronic trading. Kenneth Cutroneo joined Prime Executions in trading sales after working in electronic trading sales at Knight Capital.
While many have left Knight, there are new faces inside KCG Holdings, the newly formed amalgam of Knight Capital and Getco. Charles Susi joined in mid-August from UBS and will head product development for the firm’s client execution services group. Susi reports to Greg Tusar, who joined KCG from Goldman Sachs, as co-head of global execution service and platforms. Tusar will work alongside Albert Maasland, who is co-head of global execution services at KCG.
Knight may have been burned by the dragon, but its talent live to fight another day.
Ken Murray, CEO of hedge fund recruitment firm Mercury Partners, said he is not surprised that former employees at Knight Capital are finding work elsewhere. Although Knight was almost entirely destroyed by its catastrophic IT meltdown, the firm itself and its employees still enjoy a measure of respect on Wall Street. “If they produced revenues and positive P&L, that is what firms are looking for. For those guys, results are very important,” he told Traders Magazine. “There are some good people there.”
50 Shades of Dark Pool
By John D’Antona Jr
Dark pools are going to be less dark.
That’s due in part to recently proposed rules from FINRA that will require operators of registered alternative trading systems-also known as dark pools-to report to the regulator on a weekly basis the volume of every security they trade. FINRA would then publish that data on a delayed basis on its website. For larger stocks, it would report the data after a two-week delay. For smaller stocks, it would report the data after a four-week delay.
Behind the rule, FINRA told the Securities and Exchange Commission in a filing, is a need to better police the SEC’s Regulation ATS, which requires ATS operators to publish the quotes in any security once they reach 5 percent of the total. Also, FINRA believes that “publicly disseminating the ATS trading data for equity securities will provide enhanced transparency and understanding into trading activity by ATSs in the over-the-counter market.”
Driving the idea for such a rule are exchanges’ and regulators’ concerns that too much trading is taking place off-board in dark pools and brokers internalization engines. That hurts price formation on the public exchanges. FINRA’s disclosure rule is considered a positive first step in achieving an understanding of the extent of dark pool trading.
FINRA is proposing the relatively lengthy reporting delays so as not to jeopardize the economics of an ongoing trade by prematurely leaking sensitive information. In its filing, the regulatory body indicates the durations of the delay periods are subject to change.
Dark pool operators are in favor of such rules. Speaking at a recent industry conference, a Barclays executive noted that his firm was in favor of the transparency into dark pool operations that any disclosure would bring.
“We want that information out there,” Barclays head of equities electronic trading Bill White told attendees recently at the Investment Company Institute’s annual market structure conference. “We want it disclosed.”
And the buyside agrees. Cheryl Cargie, head trader at Ariel investments in Chicago, said the focus on dark pools and making them more transparent was a positive for the market.
For the most part, comment letters to FINRA welcome the move towards greater transparency, but some queried a suggested cost or levy to recoup costs of the new reporting process.
Several respondents to the dark pool reporting proposal, including investment Company Institute (ICI), a provided of market data and industry onsultancy, and block crossing network Liquidnet, questioned whether a fee should be charged and collected for the data.
Under the current proposal, ATSs would report weekly aggregated trading volumes to FINRA and the number of trades by security, which would be made available to the public on a delayed basis.
Dark pool data would be made available free of charge to non-professional entities, while others would have to pay a fee. The establishment of a market participant identifier, or MPID, would eventually replace the reporting function.
ICI and Liquidnet say the fee seems unreasonable, despite being encouraged by moves toward greater market and off-board transparency.
In its comment letter, Liquidnet’s chief executive Seth Merrin argued that cost of running the reporting function should be incurred by FINRA members.
“FINRA notes that an important objective of the rule proposal is to enhance the transparency of trading activity in the over-the-counter market,” Liquidnet’s wrote. “Making the data available to all users without cost would be the approach that is most consistent with this objective.”
Then There Were Three
By Peter Chapman
Against a bleak backdrop of declining volume and rising off-board trading, the third- and fourth-largest exchange operators announced a merger this year.
BATS Global Markets and Direct Edge Holdings will combine their four exchanges under one umbrella, creating an organization that will rival leaders Nasdaq OMX Group and NYSE Euronext in terms of market share. “We plan to leverage our combined resources to create greater market efficiencies for the entire trading community,” BATS chief executive officer Joe Ratterman told Traders Magazine after the announcement. “We believe there are many synergies to be realized by bringing our businesses together, which in turn will benefit our customers.”
Ratterman will become chief executive of the combined firm, while his counterpart at Direct Edge, Bill O’Brien, will become president. The deal brings together BATS’s 164 employees with Direct Edge’s 135. Based on data for a recent week in November, the four exchanges of the combined organization will control about 20 percent of total volume, roughly the same as the three exchanges owned by Nasdaq and the three operated by NYSE Euronext.
At least one analyst calls the merger a positive development. Sayena Mostowfi, a senior analyst at Tabb Group, cited better technology, a more diverse customer base and global reach as attributes of the combined firm. Mostowfi takes the long view, noting that exchange and ECN mergers are par for the course. Island ECN merged with Instinet in 2002. The New York Stock Exchange merged with the Archipelago Exchange in 2005. Nasdaq acquired the Philadelphia and Boston exchanges in 2008. “It’s not a big surprise that people would find synergies,” she said. “That they are a stronger force together than apart.”
The BATS and Direct Edge CEOs expect some of that synergy to be found in the business of selling market data.
“When you put the two companies together and realize they have a content set that is bigger than Nasdaq’s, you significantly accelerate the ability to bring competition to that market,” O’Brien told Traders Magazine. “You significantly expand the content choices available to the end user and lower his costs at the same time.”
The merger will allow BATS and Direct Edge to lower their costs as well. All trading will migrate to BATS’s platforms, and support will be streamlined. “We’ll certainly consolidate some of the operational backbone,” O’Brien said. “You’re not going to have four groups of people running all four exchanges.” More efficiency may be warranted. Both BATS and Direct Edge are privately held and don’t make public their financials, but industry volume and exchange market shares tell a grim tale. Average daily volume has dropped 20 percent over the past two years to around 6.2 billion shares. At the same time, off-board trading has grown from about 29.5 percent to 36.5 percent of total volume. During this period, BATS’s market share trended down, while Direct Edge’s stayed the same.
The Buyside Takes Control
By John D’Antona Jr.
The buyside is taking control of its trading-from algorithms to order handling to venues-and relying less on the sellside.
When it comes to the sellside and its order handling, the buyside is simply fed up with what it sees as order routing that benefits the brokers and not its own interests. Orders go to where the biggest rebate can be acquired, or orders are internalized or go to broker’s own dark pool.
In a game-changing move, the buyside has opened its own dark pool, IEX. This new venue is aimed at providing best execution to the buyside by using some features they’ve clamored for: no rebates for order flow, offering a limited number of order types and not co-locating client servers with its own matching engine.
The sellside is IEX’s customer. And they are joining quickly, said Ronan Ryan, chief strategy officer at IEX, who recently told Traders Magazine that most of the bulge firms are already signed on to send orders to IEX and discussions with other brokers are ongoing. All orders sent to IEX must come from a broker-dealer, else it risks losing a buyside client’s order flow. There is no minimum order size required to trade at IEX, and it offers clients the ability to set minimum quantity parameters on their orders.
Buysiders also want to know how their algorithms work. Money managers want to know exactly how their orders are sliced and diced, and they want a greater level of transparency from their sellside providers and others. According to a recent report from consulting firm Woodbine Associates, buysiders said the sellside has to either explain their algorithms’ workings in a straightforward manner or watch order flow go elsewhere. Only 46 percent of those surveyed said execution consultants can clearly describe the operation of their algorithmic offerings.
For the past couple of years, buyside traders have been lobbying their brokers and the regulators behind the scenes to green-light a pilot program that would either lower exchange rebates for certain stocks or replace the maker-taker regime with a fee-say, three mils-on both sides of the trade.
The money managers’ concern is that brokers may be routing their orders to venues that pay the highest rebates, rather than those that offer the best execution. In such a case, the broker pockets the rebate and the buyside gets an inferior fill.
“Any inducements to order flow routing insert a conflict of interest,” Andy Brooks, head of equity trading at fund managers T. Rowe Price Associates, said at a recent ICI confab. “It is an issue. I want to see it addressed and experimented with and challenged.”
Others want to see order routing decisions addressed too. A consensus of traders from 37 buyside desks who participated in a workshop put together by Bloomberg Tradebook said they want more transparency in order routing.
Fidelity Capital Markets has launched a free service for the buyside through a vendor unit that lets buyside customers set up their own routing logic, circumventing the sellside altogether. This vendor-based offering competes directly with the brokers and is in use, FCM said, by some of the biggest buysiders, who don’t want to cede routing control to their brokers.
“We need more control, as trading has become so fragmented and you need to be everywhere,” said Nanette Buziak, head of equity trading at ING Investment Management. “We need to maintain full control of an order in this complex environment. It drives me crazy when my order goes to a high-touch cash desk and the order gets thrown into an algo anyway-I might as well keep control myself and use an algo.”
Mo’ Glitches, Mo’ Problems
By Phil Albinus
“Again!?” If there was one universal expression heard on Wall Street, the capital markets and inside nearly every investment firm large or small, it could be, “Not another trading glitch.”
Last year Traders Magazine came close to naming 2012 the Year of the Trading Glitch. But with the near-constant wave of trading outages, software malfunctions and data logjams, we can safely say 2013 was the year they became commonplace.
Let’s take a quick tour of the outages that came and went this year:
In August alone-usually the sleepiest month on Wall Street-trading outages plagued BATS, the CBOE, Deutsche Brse’s Eurex and the Tel Aviv Stock Exchange. Chinese brokerage Everbright experienced a so-called “flash surge,” while Wall Street giant Goldman Sachs suffered an outage for an afternoon in the same month. But the hands-down biggest trading glitch that truly rattled the markets and industry observers was the Nasdaq OMX outage that halted trading across the entire exchange for three hours in August. As the outage unfurled, the talking heads on CNBC quickly transformed into screaming heads.
Although traders appear to have taken these outages almost in stride, there have been real consequences. Goldman Sachs reportedly suspended four IT workers for updating software that caused its outage, which may have cost the firm as much as $100 million in trading losses. Nasdaq, the exchange that promotes its high-tech prowess, not only had to pay the largest fine for mishandling the 2012 IPO of Facebook, it also lost out on the IPO of another social media superstar, Twitter, last month. Nasdaq OMX CEO Robert Greifeld also received a drubbing in the media for being AWOL for nearly 24 hours during and after the three-hour outage.
In the weeks before the launch of Twitter last month-arguably the most anticipated Web 2.0 IPO of the year-the New York Stock Exchange took the unusual step of testing the IPO on a Saturday. This is the first time Aite Group senior analyst Robert Stowsky had ever heard of an exchange testing a forthcoming IPO in public. “Exchanges usually do lode testing over the weekend, but maybe they were grabbing a headline to say that ‘We’re doing a test of the IPO,'” he said.
And now the SEC is getting involved. This fall, the regulatory body proposed Regulation SCI to enforce routine tests of systems inside exchanges and investment firms. “While it’s not possible to prevent every technological error that market participants may commit, we must ensure that our regulations are designed to minimize their impact on our markets and ultimately investors,” said SEC chairman Elisse B. Walter on the SEC’s website.
According to one buyside trader, these glitches are expected, but they do have an impact. Thomas Garcia, head of equity trading for Thornburg Investments, told Traders Magazine that on the day of Twitter’s IPO on the NYSE, the exchange’s OTC trading was down for a few hours.
“At this point, it’s probably something that we should be used to, but when it ends up affecting you, it still frustrates you tremendously. The one that happened today definitely affected us, because we had some new accounts that we had to get invested. We couldn’t invest them, because we have some pink-sheet stocks in those specific strategies,” he said.
Garcia added, “So it was a little bit frustrating. It just seems like this is happening more.”
Overnight Blocks Buck Volume Trend
By Peter Chapman
Volume is down this year, but don’t tell that to the industry’s big block traders. For those guys trading billion-dollar blocks as part of overnight secondaries, business is booming.
According to data from Thomson Reuters, a clutch of the biggest banks handled $64 billion in “overnight” block trades for the 12 months that ended Oct. 31. That compares to about $40 billion in the prior 12-month period.
Behind the surge is the relative calm of the stock market as well as a dearth of liquidity. Both sellers and buyers are comfortable participating in these huge deals.
“The institutional buyside-the mutual funds and hedge funds-have become much more comfortable with doing bought transactions,” Scott Bacigalupo, Bank of America Merrill Lynch’s head of Americas cash sales and trading, told TradersMagazine earlier this year.
They’re called overnight block “trades,” but they’re really akin to secondaries that happen on a moment’s notice. Rather than spend two weeks on the road hawking their shares, owners-often private equity firms-dump them quickly at a discount.
Nearly one-third of all secondaries completed this year have been done as overnight block trades, according to Dealogic.
Owners contact a select group of broker-dealers shortly before the market closes and request a bid. The trades are typically valued at more than $1 billion and are priced off of the day’s last sale. The bidding ends at around 4:15 p.m. EST, and then the winning bank starts contacting its buyside customers looking for buyers.
The sale to the money managers is completed by the time the market opens the next day.
Most of the trades are done by a handful of firms that make their money from the spread between the price they pay for the block and the one they get for it from the money managers.
According to data from Dealogic, Citigroup, Barclays and Goldman Sachs have dominated the practice in 2013-controlling about 60 percent of the business.
Perhaps the most prominent block trade of the year was the $500 million sale of J.C. Penney shares by hedge fund manager Bill Ackman in August. The deal was handled by Citigroup. Ackman, who runs the Pershing Square fund, lost a reported $410.7 million, or half of his investment, on his original purchase of the J.C. Penney shares in 2010.
The business comes with its contradictions. While the overnight trade is a fairly routine transaction done by the same people over and over again, taking down a billion dollars worth of stock is not for the faint of heart.
“If it’s a private equity firm selling down another 15 percent of a stock that it has done on a regular schedule, then to Wall Street, it’s just a piece of meat to be priced,” said one big firm trader, who requested anonymity. “So, you basically have nine dogs fighting over this piece of meat, and the winner is sometimes not the winner.”
Barclays LX Surpasses Crossfinder
By John D’Antona Jr.
Move over Credit Suisse, Barclays is now king of the dark pools. Technically.
After a long buildup during which it trailed Credit Suisse Crossfinder, Barclays LX is now top of the heap. However, before Barclays pops the champagne corks, this may be due to a technicality, as the Swiss bank stopped reporting its dark pool volumes in April. Credit Suisse declined to say why it’s staying mum with its dark pool numbers.
Amid a multiyear retooling effort and upgrading of its technologies, Barclays LX dark pool gained market share that has propelled it to top place among its peers, according to reports from both Tabb Group and Rosenblatt Securities.
In the latest month, 107 million shares-16 percent of all volume on dark pools-were traded each day on LX, according to the Tabb Group Liquidity Matrix, a monthly liquidity and pricing report for U.S. equities exchanges, electronic communications networks, dark liquidity pools and crossing networks. Coming a close second among the brokers was Goldman Sachs’ Sigma X, which traded 71 million shares or 11 percent of dark volume.
Rosenblatt Securities, another tracker of U.S. dark pools, reported in its February analysis that LX grabbed 1.41 percent of total consolidated volume of 6.4 billion shares traded daily on all lit or dark venues. That, too, trailed only Crossfinder, which snared 1.88 percent. After Crossfinder and LX came Goldman Sachs’ Sigma X, UBS’s ATS and Deutsche Bank’s Super X pools.
Bill White, head of equities electronic trading at Barclays, told Traders Magazine that the firm laid out a plan two years ago to overhaul their offering end to end, gain market share and provide clients with the best electronic trading tools in the market. Gaining the top spot among the broker-sponsored offerings is the product of all that work and effort.
In 2009, its LX dark pool was languishing in 10th place among its peers. By 2010, it jumped three spots to number seven, and then in 2011, it climbed yet again to fifth place. By January 2012, LX had once again moved upward, joining the ranks of Knight Capital Group’s Knight Link and Deutsche Bank’s Super X. But the upward trajectory continued throughout the year, as LX climbed over Knight and Deutsche Bank by December.
With momentum on its side, LX vaulted over Goldman Sachs Sigma X this year to rest at number two, firmly behind Crossfinder. And getting into and unseating Goldman in that uppermost of echelons is something that hasn’t been done since 2007, said Tabb Group analyst Cheyenne Morgan. She pointed to the firm’s revamping of its electronic products, such as algorithms and its smart order router, as well as its active promotion of technology, as the keys to success.
“Barclays LX saw a 10 percent increase in volume in January versus December, which is a good way to start the year,” Morgan said. “Passing Sigma X is extraordinary,” Morgan said. “Barclays took a step back and revamped their products and strategies. They knew they had to hone in on their electronic strengths and get the word out.”
Barclays’ Bill Bell and Bill White told Traders Magazine previously it was employing a three-pronged strategy to achieve its goal of moving up from the middle of the pack and into the top echelon of broker-dealers. Bell, head of equities electronic and program distribution, and White, said previously their strategy was to deploy its smart-order router globally, grow its dark pool Barclays LX and simplify its algo offerings.
Barclays said that it completed an overhaul of the firm’s electronic trading products to increase efficiency between the firm’s algos, its Dynamic Router and the LX dark pool. And now, Bell said, the results are paying dividends as the desk has seen both its high- and low-touch volume increase, as has the amount of trading flowing through LX. Bell pointed to better order-routing practices and increased awareness of the firm’s product offerings via client meetings as keys to its success.
“All executions, whether they are high-touch or low-touch, go through LX,” Bell said. “We look at everything together now in this new trading paradigm.”
Bell added the firm’s strategy for juicing volumes also included hitting the pavement and visiting not just the institutional investors, but also its broker-dealer business and meeting with smaller and regional firms who don’t have an electronic trading offering. The firm declined to specify how many new clients it has picked up.
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