JPMorgan has launched an anonymous crossing network that will bring together orders from its own trading desks as well as external sources.
As part of a growing and somewhat controversial trend among dark pool operators, the system will also transmit IOI-like messages to potential counterparties.
“We are launching a dark pool now partly because we weren’t really happy with the results we were seeing on the block side,” Carl Carrie, global head of JPMorgan’s Neovest direct market access unit and algorithmic products. “We wanted to achieve higher crossing rates for algorithms.”
Called JPMorgan Lighthouse, the new system is not just a dark pool that anonymously matches buy and sell orders. It also functions like an algorithm–a meta-algorithm, Carrie says–because it also seeks out non-displayed liquidity in other venues.
The name was chosen to reflect that the system scans the dark venues much as a beam of light from a lighthouse scans darkened seas.
Carrie maintains this ‘aggregation’ feature will differentiate JPMorgan Lighthouse from competing offerings.
Importantly, JPMorgan will not be relying solely on its own order flow to drive trades in JPMorgan Lighthouse. The firm has entered into agreements with a number of broker-dealers, exchanges and ECNs to supply liquidity to the system.
Also, importantly, JPMorgan will jump on one of the Street’s latest bandwagons by programming the trading system to send out “indications of liquidity” to potential counterparties.
Similar to IOIs, or indications of interest, the FIX messages notify broker-dealers’ order handling systems of an order sitting in Lighthouse.
The recipient’s system may then enter into a trade with Lighthouse. The messages–which may contain size and side information–can only be “seen” by the recipient’s system, not by any human traders.
The practice of dark pools sending out IOI-like messages is growing, sources say, with organizations such as NYFIX and the International Securities Exchange engaged in the practice.
Crossing systems that engage in the practice are often called “gray pools,” in a nod to their less-than pitch black environment. By sending out indications the chance of a match is increased, proponents say.
The practice is considered controversial because the orders sitting in dark pools are supposed to be invisible to the outside world. Buyside traders use the systems partly for their cloaks of anonymity.
Sending out a trade message advertising the existence of an order in a dark pool violates that confidentiality, some argue.
Others point out though that any message-sending typically occurs at the discretion of the buyside trader. The trader can veto the transmission of outbound messages if he chooses.
Still, at a recent TraderForum gathering of buysiders in January, one attendee said that about half of the head traders in one session said they were unaware of the practice.
At this year’s TradeTech conference, Andrew Silverman, an electronic trading executive with Morgan Stanley, told the assembled crowd that most buyside traders were unaware of the practice. “But they should be,” Silverman warned.
Buyside traders using JPMorgan Lighthouse will have the ability to “turn the outbound indications off,” Carrie said. “The customer has control over the handling of their dark order.”
