Large broker-dealers that operate dark pools are falling over themselves to attract retail flow. Because retail-size orders are now larger than the average executed order in the market, their presence in dark pools is coveted. The scramble for retail flow is also enabling some dark pools to boost their executed volume at a time of increased dark-pool competition.
Credit Suisse in December launched what it calls its CrossFinder Retail Network, an initiative to accumulate and pass retail flow through CrossFinder, the broker’s ATS, to match up against resting institutional orders. Credit Suisse has about a dozen retail brokerage clients, according to Dan Mathisson, head of the firm’s Advanced Execution Services group.
Citi, Knight, UBS and others are also stepping up efforts to pull retail orders into their dark pools. The retail flow streaming through these pools is typically en route to the market.
For Credit Suisse, what’s behind this newfound interest in retail flow is size. The average size of a retail order is now larger than the average institutional “child” order, since institutions often spray big orders into the market via algorithms that seek liquidity as invisibly as possible. The retail flow Credit Suisse currently sees averages close to 600 shares per order, compared to an average execution size of just over 220 shares in the market, Mathisson said.
Another benefit is the attractiveness of retail flow. Institutions would “rather trade versus Grandma in Peoria than versus Mr. Quant Hedge Fund,” Mathisson said. CrossFinder’s average daily volume in February was 105 million, up from 85 million in January and 60 million in December. Some of the increase is the result of higher overall market volume, but retail flow “certainly had an effect,” Mathisson said.
Citi, which re-launched its internal dark pool based on technology and clients gained from its Automated Trading Desk acquisition last October, also stresses retail flow. Its newly transformed (and renamed) pool, Citi Match, enables institutions and Citi algorithms to match up against retail flow from Smith Barney clients as well as 130 retail broker-dealers acquired through the ATD purchase, said Dan Keegan, head of global electronic trading sales at Citi.
Keegan expects Citi Match’s expanded customer base to increase its executions. “We’ve created a mechanism whereby all ATD flow and Citi flow–Smith Barney, Lava, Citi’s various desks and algos–can wash through one box,” Keegan said. He added that Citi represents 13 percent of consolidated NMS volume.
UBS’s Jatin Suryawanshi, head of U.S. algorithmic trading, also views retail orders as a magnet for institutional flow. “Institutional clients come to PIN [UBS’s Price Improvement Network] for the retail flow,” he said. “Institutions can benefit from full spread capture and can interact with less-toxic liquidity. And this helps retail clients, because there’s no market impact.”
According to Suryawanshi, half of the 450 million to 500 million shares that pass through PIN daily are retail flow from broker-dealers and from the bank’s giant wealth management unit. That flow has a “significant emphasis” on small-cap and mid-cap stocks, which helps institutions and UBS’s algos get executions in less liquid names, he said.
Among big brokers, Knight may have the longest track record in bringing retail liquidity to its dark pool. That flow has proved enticing to institutions. Retail flow is the “watering hole that brings the elephants around,” said Bill Cronin, a managing director at the broker. The firm has more than 150 institutions connected to Knight Match. Those firms, along with two brokers Knight has reciprocal relationships with, can rest orders in the dark pool to interact with retail flow passing through.
Cronin pointed out that Knight’s steady flow of retail orders “has been the principal differentiator” between Knight’s dark pool and those of other brokers since Knight Match launched in 2006. About 80 to 90 percent of Knight Match executions occur against retail flow, he said. Institutional crossing wasn’t initially part of the crossing structure, but was added about a year ago.
At Citi, Knight and UBS, retail flow passes first through the firm’s dark pool and only then through the market-making unit. These firms don’t allow electronic market making within their pools.
Some broker-dealers with market-making divisions, such as Citi, compete for retail orders by guaranteeing retail brokerages a percentage of price improvement over the national best bid or offer. That promise extends to retail executions against institutions within dark pools. In contrast, some dark pools execute retail orders at the NBBO. Others, like Credit Suisse, which handles only agency orders, execute retail flow somewhere within the NBBO, based on the limit prices of the matching orders.
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