The New York Stock Exchange’s dark pool joint venture with the parent company of BIDS Trading is expected to be up and running by summer. The planned exchange facility, which requires Securities and Exchange Commission approval, will attempt to match non-displayed blocks sitting in the crossing facility, posted liquidity on the Big Board’s display book, and floor brokers’ reserve orders.
“The facility will be a place for blocks to trade,” said Tim Mahoney, CEO of BIDS Trading, a crossing system owned by a consortium that includes 12 big broker-dealers. “It’s about the convergence of displayed and non-displayed liquidity, which doesn’t exist anywhere else for blocks.”
The NYSE-BIDS JV, which is currently in development, and BIDS Trading, which launched in April 2007, will be separate pools but will have some similar functionality. The JV is owned 50-50 by NYSE Euronext and BIDS Holdings, the parent of BIDS Trading.
According to Mahoney, the JV will combine three types of distinct order flow, which currently do not interact efficiently, within a single pool. That flow includes non-displayed orders that will rest within the JV facility, orders posted to the exchange’s display book, and reserve volume posted by floor brokers. Later this year when upstairs brokers gain the ability to submit reserve orders to the NYSE, that flow will also be eligible for executions in the JV facility.
“Orders posted on the NYSE–displayed or reserve–will now have the opportunity to trade against orders in the facility when blocks trade,” Mahoney said. “The goal is to maximize the amount of liquidity in the facility.” The JV will automatically match orders based on their limit prices.
With the reduction in block trades at the NYSE, a perk of the JV facility is that, unlike many crossing systems and broker dark pools that execute at the NBBO midpoint or within the spread, the new facility will enable price discovery for blocks. It will allow executions to take place outside the NBBO. To comply with the SEC’s quote protection rule, the system will send out intermarket sweep orders to execute against top-of-book protected quotes in other markets as necessary.
However, on the NYSE itself, the full depth of book will be protected by the JV facility. “If you’re posting on the NYSE display book or you have a reserve order in the NYSE, you won’t be traded through by a facility order,” Mahoney said. “The facility will protect displayed and reserve orders in the NYSE.” Mahoney added that the JV would also like to give users pegging functionality within the facility.
Non-displayed orders can be placed in the JV by NYSE member firms, their sponsored customers, and buyside and sellside users of BIDS Trading that have chosen to have their orders represented in the JV as well. (NYSE members, however, cannot automatically place orders into the BIDS Trading dark pool unless they become participants of that pool.)
Mahoney said the NYSE plans to submit a rule filing about the JV facility to the SEC soon. In 2006, the regulator nixed the Boston Stock Exchange’s partial ownership stake in the consortium that owned LeveL, a new dark pool for equities. However, that action was based on the SEC’s earlier decision that exchanges could not own broker-dealers except for routing purposes. The NYSE-BIDS JV will be run as a facility of the NYSE, and will not be a separate broker-dealer.
