Citi will shut down its LavaFlow ECN in late January, according to a Citi official who runs the electronic communication network.
The reason for closing the eight-year old trading venue was due to constrained resources,according to Dan Keegan, head of U.S. equity operations for Citi.He denied that the ECN’s closure was due to $5 million fine from the Securities & Exchange Commission this June. The SEC ruled that the firm had failed to protect clients confidential data.
In the ordinary course of business, we do periodic reviews that aim to marry resources with where we believe there to be the highest return potential. This is especially true in a resource constrained environment. In the context of LavaFlow, while we achieved a modicum of success, we did not achieve the level of scale that would warrant continued investment, Keegan told Traders on Monday, December 1 in an exclusive interview.
Clients of the ECN will be notified today that the last day of operation will be at the end of January 2015. Citi has notified the ECNs employees but declined to say if they will be reassigned or laid off. Keegan also declined to mention how many Citi staffers worked on the ECN. The bank is also in the process of notifying various regulators on the pending ECN shutdown.
We are in the process of notifying clients and will continue to do so over the next 24 to 48 hours. We anticipate closing down LavaFlow at the end of January which will provide more than ample time for our clients to make the necessary changes from an order routing perspective, said Keegan.
LavaFlow clients are almost exclusively from the broker-dealer community.
Despite having a small share of U.S. trading volume, LavaFlows trading had remained steady, according to Keegan. Volumes have vacillated between 1 and 1 and half percent over the balance of the year, hence a pretty tight range all things considered.
That said, LavaFlow did not achieve its goals for Citi. The ECN and dark pool space are very much scale-driven businesses. Unless you achieve a certain level, the economics can prove to be quite challenging. In the case of LavaFlow, we didn’t achieve the type of scale necessary to generate appropriate returns for running an asset akin to this, said Keegan.
Keegan told Traders thathe will remain in the US equities business to concentrate on delivering other trading solutions for the broker-dealer community. Within the Equity arena, Citi is a full service research provider with global execution capabilities across Derivatives, Cash and Delta 1. Put simply, there is no shortage of investment opportunities, hence the need to be judicious in terms of the products you run, services you provide the world over is ever present.
As for dark pool and lit exchanges, Keegan sees a time of sober looking at volumes and revenue in the coming year. Across the street, teams continue to operate in a resource constrained environment. Accordingly, managing ones business efficiently is of paramount importance. Execution venues are one such example where managing to the risk/reward is a necessity.
