Though MatchPoint is still in its infancy, it is already proving its potential with its initial prints to the tape. In a sea of faceless 100-share prints, MatchPoint trades stand out! For example, on Monday, MatchPoint executed the following matches (three among many and forgive the formatting):

Ticker Shares Price Time

SLT 2,900 $5.655 14:00:17
DVA 2,600 $45.870 10:00:24
SMTC 2,200 $13.155 13:00:23

Each of these trades (as small as I admit they are) dwarf any of the surrounding prints at the same time. And each MatchPoint print is clearly identified as an NYSE trade with an “X” identifier. And still, MatchPoint’s collective participant approach prevents even users (and tape-watching predators) from knowing whether a MatchPoint trade was against one large contraside or a combined contraside of many smaller users.

Liquidity aggregation, complete informational control and trade transparency all at the same time! Proof is on the tape and in your trading performance…unless, of course, you are not participating! Looking forward to seeing you on MatchPoint.

When the Securities and Exchange Commission wrote Reg. National Market System (NMS), they highlighted the importance of “competition between markets” as a way to foster innovation which would thus help “minimize” transactions costs for investors. Yet today we find a marketplace awash in alternative trading system (ATS) business models competing on the basis of liquidity, speed and rates rather than dark-order innovation and quality of execution. Sure there are a bunch of ways to commercialize existing internal liquidity or pricing schemes to attract new order flow, but most dark pools are pretty much the same. All are anonymous and their primary innovation focus seems to be concessions on order opacity to improve their hit rate. It is not a quality-of-execution strategy but a quantity-of-execution strategy.

This lack of quality innovation is not just an interesting sidebar; it has profound consequences for the investor and our marketplace.

If we reflect on our old friend the “transaction cost iceberg” it is clear that fees and spreads are just the visible tip of the iceberg. Underneath the “waterline” are the hidden transactions costs of market impact, execution delay, information leakage, price drift or slippage and gaming. It is these hidden costs not the visible ones that threaten to sink the investor’s “ship” and the ultimate irony is that the SEC’s “competition between markets” philosophy adopted by the ATS marketplace has actually increased transaction costs for investors rather than decrease them.

Clearly some of the blame falls on the ATS industry’s commercially driven focus on the quantity strategy (visible costs) as opposed to the quality strategy (hidden costs). We seem more eager to find new ways of making a dark order more visible (and executable) and yet still call it dark than to actually create new ways to control information leakage or reduce execution delay. Just look at the ATS average trade size, the growth of dark algorithms, rebate models, indications of interest (IOIs) and routing out.

And to compound this problem there is the fragmentation caused by so many competing dark pools and their collective effect on liquidity. Investors are forced to probe, ping, IOI, slice and dice their way through 50+ competing and independent dark pools. By the time they complete their order, delay has eroded their investment alpha and thousands of trades to the tape have betrayed their valuable order and trading-strategy information. Whatever intrinsic value that may be found in each individual dark pool, it is forfeited (and then some) by the hidden costs arising from the over-serviced ATS marketplace.

Interestingly, the solution to the ATS fragmentation problem and the way to effectively reduce transactions costs for investors will be found not through dark-pool competition but through exchange neutrality. Rather than fragment liquidity through competition, an exchange facility as a neutral business and trading environment can bring competing brokers together and aggregate liquidity for everyone’s benefit.

The power of neutrality can be seen through the dramatic rise of the pioneers in the ATS industry; the electronic agency brokers. They used their agency neutrality as a primary way to attract liquidity. But of course, as agency brokers their neutrality begins and ends with “best efforts” execution. As they have gotten bigger, they have become more of a competitor to other brokers than a neutral destination.

But, exchange facilities like NYSE’s MatchPoint and the soon-to-be-launched New York Block Exchange, using neutrality as a core principle, represent the next and possibly final chapter of the ATS revolution.

Supported by published rules governing fairness and operational transparency, global infrastructure, and a robust surveillance and enforcement effort, these neutral exchange facilities are a perfect blend of dark-order innovation and exchange neutrality. A winning combination for all investors.

The author is vice president of NYSE MatchPoint and ATS Strategy, NYSE Euronext.

NYSE CEO Duncan Niederauer on our equity culture as well as hedge funds, leverage, regulation, NYX and more
(Nightly Business Report, video or transcript)

Markets Open on Inauguration Day (WSJ.com)
A spokesman for the Big Board, a unit of NYSE Euronext, said of the Jan. 20 inauguration: “That will be an important and historic day for America as well as for the rest of the world, and the best way for us to mark the occasion as a global financial marketplace is to be open for business.”

NYSE MatchPoint Revs Up Today (Client Notice, Backgrounder Slides, Exchanges post)

Capitalism and Trust (Robert Bruner) — Excellent read, including J.P. Morgan’s famous exchange with a Congressman, in part:
UNTERMYER: Is not commercial credit based primarily upon money or property?
MORGAN: No, sir: the first thing is character.
UNTERMYER: Before money or property?
MORGAN: Before money or anything else. Money cannot buy it.

Is Financial History Bunk? (Paul Kedrosky’s Infectious Greed)
The Value of Financial History (David Merkel)
What do you think: valuable, bunk, or somewhere in between?

In Today in NYSE History (NYX.com), a reminder of the Great Depression (no shortage of such reminders these days!):
07 Jan. 1933 — The Exchange was closed for the funeral of Calvin Coolidge.

My MPLC (MatchPoint-leading colleague) Jim Ross tells me that tomorrow kicks off a liquidity drive for this new NYSE exchange facility. And what exactly does that mean, you ask? Well, funny you should ask. Starting tomorrow, a number of major users are expected to begin participating in NYSE MatchPoint’s intraday and after-hours matches. At the top of every hour throughout the day, MatchPoint aggregates all the orders in the system at that moment, and brings them together for ONE. BIG. MATCH.

This is something new and different from us, and as you may have noticed — hello? — you don’t exactly see new and different things from us every day.

So consider this an invite to the party. You never know who you might meet. Or should I say, you never know whose orders might meet yours. Because it’s anonymous. Non-displayed. And it’s centralized. Neutral. Level playing field. Can trade blocks or portfolios. Will watch your kids if you need a night out.

OK, the baby-sitting is extra.

All kidding aside, definitely worth checking out. Here’s a couple of slides that explain all of the excellent features better than I’ll ever be able to, and a memo to traders about tomorrow’s kickoff. See you at the party.

In my last post (which was an eternity ago back in July (just ask my 401(k) — it is kind of a 201(k) now), I highlighted the curious phenomenon that most of the dark pools, which employ anonymity and opacity in order to attract larger order size, have average trade sizes well below 600 shares. And who needs to cloak a whopping 300-share order anyway? But the small-trade-size phenomenon is more than just an intellectual curiosity. It is a symptom of a much bigger problem. We have lulled ourselves and the investors into thinking that anonymity and order opacity will fully answer for the negative performance attributed to transaction costs. And while “darkness” is a critical component of the transaction-cost puzzle, it does not in and of itself complete the whole transaction-cost “picture.”

Wayne Wagner, a pioneer and a leading figure in transactions cost analysis over the past 2+ decades, places transaction costs into two categories: visible and hidden costs. Visible costs like commission, spread costs and market impact are relatively easy to identify and quantify. Competitive pressures, technology and regulation have greatly decreased both commissions and spreads but anonymity and order opacity have been driving factors behind minimizing (though not eliminating) market impact.

Market impact is an elusive quarry, though. For while an order in a continuous dark pool or dark algo may be completely anonymous and totally non-displayed (pre-trade), it can still incur substantial market impact post trade. Jamie Selway gave a good example in our last blog chat when he said, “What about the fact that as you traded at the midpoint 123 times over the course of an hour, the midpoint moved against you 2%? No ‘tactical’ market impact, sure; but obviously tremendous impact overall.” The multiple-small-trade “footprint” of a continuous dark pool or dark algo can give away post trade all the transaction’s cost benefits (and more!) that pre-trade anonymity and opacity can bring to an order.

But, hang on; we have not even gotten to hidden costs yet! The hidden costs that Wayne identifies are delay and missed trades. In a recent presentation, Wayne described them in this way: “Hidden costs are 2-3 times the visible costs. Hidden costs arise from the need to trade in sizes that swamp the market. Waiting — or searching — for liquidity creates these costs. They are often as poisonous to performance as any other cost.”

The obvious consequences of delay and missed trades are information leakage, slippage, opportunity cost and even gaming. Each one festers the longer it takes to complete an order whether it is sliced into small orders over time or shopped to multiple dark venues.

But there is also a much-overlooked consequence and that is the lost benefit of the original investment decision (first-mover advantage, if you will). We focus so much on avoiding the costs of a transaction through slicing and dicing that we fail to capture the timely VALUE of an investment decision. Executing a block transaction quickly is still a valuable and perhaps preferable execution strategy to slicing a block into tiny orders.

For a dark pool to be truly effective across the transaction-cost spectrum (and thus capable of trading large blocks), it needs to be more than just “dark.” And clearly one of the more problematic aspects of today’s dark-pool and dark-algo offerings is their continuous, real-time nature. (Interestingly, all of the dark pools with small trade sizes are also continuous.) Each trade becomes a footprint and each subsequent footprint becomes a billboard betraying the investor’s trading intentions.

For those who know me, yes, it appears that I am simply trumping up the fact that a totally dark point-in-time cross like MatchPoint is the solution to the continuous issue (and it IS an elegant and effective solution at that!) but there are dark pools (continuous and not) that do go beyond “darkness” and are constructed in a way that smartly and effectively minimizes post-trade market impact and the hidden costs mentioned above while still catering to anonymity and order opacity.

Clearly point-in-time dark pools (like MatchPoint, Instinet VWAP cross and POSIT matches) break the cycle of continuous trade “footprints,” and “pinging” them is impossible. They also aggregate all trades from multiple parties into one trade report “footprint,” limiting even further any unnecessary information leakage. Other dark pools use minimum order-size requirements or functionality (like Pipeline) to inhibit algo “pinging” and attract true block liquidity, significantly reducing delay.

And block negotiation systems (like Liquidnet and BIDS) provide a pre-qualified vetting of contraside interest to reduce information leakage and promote natural block discovery as well as a “scorecard” concept to punish gaming. All of these are innovative, effective solutions to post- trade market impact, information leakage, slippage and gaming that can occur in a continuous dark pool environment, and there is more to be done for sure.

Block trades as much as algo order slicing are integral parts of the investment and transaction cycle. Understanding the transaction-cost “balance” between the two will help us evolve our marketplace to better accommodate and serve the diverse and sophisticated needs of all investors.

In my last post (which was an eternity ago back in July (just ask my 401(k) — it is kind of a 201(k) now), I highlighted the curious phenomenon that most of the dark pools, which employ anonymity and opacity in order to attract larger order size, have average trade sizes well below 600 shares. And who needs to cloak a whopping 300-share order anyway? But the small-trade-size phenomenon is more than just an intellectual curiosity. It is a symptom of a much bigger problem. We have lulled ourselves and the investors into thinking that anonymity and order opacity will fully answer for the negative performance attributed to transaction costs. And while “darkness” is a critical component of the transaction-cost puzzle, it does not in and of itself complete the whole transaction-cost “picture.”

Wayne Wagner, a pioneer and a leading figure in transactions cost analysis over the past 2+ decades, places transaction costs into two categories: visible and hidden costs. Visible costs like commission, spread costs and market impact are relatively easy to identify and quantify. Competitive pressures, technology and regulation have greatly decreased both commissions and spreads but anonymity and order opacity have been driving factors behind minimizing (though not eliminating) market impact.

Market impact is an elusive quarry, though. For while an order in a continuous dark pool or dark algo may be completely anonymous and totally non-displayed (pre-trade), it can still incur substantial market impact post trade. Jamie Selway gave a good example in our last blog chat when he said, “What about the fact that as you traded at the midpoint 123 times over the course of an hour, the midpoint moved against you 2%? No ‘tactical’ market impact, sure; but obviously tremendous impact overall.” The multiple-small-trade “footprint” of a continuous dark pool or dark algo can give away post trade all the transaction’s cost benefits (and more!) that pre-trade anonymity and opacity can bring to an order.

But, hang on; we have not even gotten to hidden costs yet! The hidden costs that Wayne identifies are delay and missed trades. In a recent presentation, Wayne described them in this way: “Hidden costs are 2-3 times the visible costs. Hidden costs arise from the need to trade in sizes that swamp the market. Waiting — or searching — for liquidity creates these costs. They are often as poisonous to performance as any other cost.”

The obvious consequences of delay and missed trades are information leakage, slippage, opportunity cost and even gaming. Each one festers the longer it takes to complete an order whether it is sliced into small orders over time or shopped to multiple dark venues.

But there is also a much-overlooked consequence and that is the lost benefit of the original investment decision (first-mover advantage, if you will). We focus so much on avoiding the costs of a transaction through slicing and dicing that we fail to capture the timely VALUE of an investment decision. Executing a block transaction quickly is still a valuable and perhaps preferable execution strategy to slicing a block into tiny orders.

For a dark pool to be truly effective across the transaction-cost spectrum (and thus capable of trading large blocks), it needs to be more than just “dark.” And clearly one of the more problematic aspects of today’s dark-pool and dark-algo offerings is their continuous, real-time nature. (Interestingly, all of the dark pools with small trade sizes are also continuous.) Each trade becomes a footprint and each subsequent footprint becomes a billboard betraying the investor’s trading intentions.

For those who know me, yes, it appears that I am simply trumping up the fact that a totally dark point-in-time cross like MatchPoint is the solution to the continuous issue (and it IS an elegant and effective solution at that!) but there are dark pools (continuous and not) that do go beyond “darkness” and are constructed in a way that smartly and effectively minimizes post-trade market impact and the hidden costs mentioned above while still catering to anonymity and order opacity.

Clearly point-in-time dark pools (like MatchPoint, Instinet VWAP cross and POSIT matches) break the cycle of continuous trade “footprints,” and “pinging” them is impossible. They also aggregate all trades from multiple parties into one trade report “footprint,” limiting even further any unnecessary information leakage. Other dark pools use minimum order-size requirements or functionality (like Pipeline) to inhibit algo “pinging” and attract true block liquidity, significantly reducing delay.

And block negotiation systems (like Liquidnet and BIDS) provide a pre-qualified vetting of contraside interest to reduce information leakage and promote natural block discovery as well as a “scorecard” concept to punish gaming. All of these are innovative, effective solutions to post- trade market impact, information leakage, slippage and gaming that can occur in a continuous dark pool environment, and there is more to be done for sure.

Block trades as much as algo order slicing are integral parts of the investment and transaction cycle. Understanding the transaction-cost “balance” between the two will help us evolve our marketplace to better accommodate and serve the diverse and sophisticated needs of all investors.

Sorry I have been absent from the MatchPoint blog for a few months. I have been recovering from a detached retina and it is hard to write when you cannot see…but there is, I suppose, something fitting in a dark pool provider having a spokesperson who cannot see. Though I am beginning to realize that what we may see before us can often prevent us from seeing the real truth. So let me get started….

For many months now, dark pools have been all the rage. All we have to do is look at the volumes to see that between 500 million and upwards of 1 billion shares a day trade through dark pools. (Lord knows how much is actually posted or routed through these systems but are not executed.) There must be huge demand for these dark pools with that volume pulsing through them…but is this really true?

One of the major (if not the primary) reasons a dark pool is “dark” or non-displayed is so that users may submit large orders and cross large blocks of stock without impacting the market or causing information leakage. Makes sense, right?

Well, recently, Justin Schack at Rosenblatt Securities printed an excellent article called “Let There be Light”. He did a review of all the top dark pools. Of the 50+ dark pools, only three actually trade blocks of stock. See for yourself. They are Liquidnet (52,000 avg. trade size in May), Pipeline (~46,000 avg. trade size in May) and ITG Posit (~5,000 avg trade size in May). Every other dark pool had average trade sizes at or below 600 shares! Do we really need a dark pool to trade 600 shares? Hmm….

Which really begs the questions, are dark pools other than the three mentioned above really adding any value at all (simply rearranging liquidity for commercial purposes); or worse yet, are they doing harm by making it harder and more expensive for investors to find true natural block liquidity? And what can we learn from the three dark pools mentioned above that enables them to realize the promise of a non-displayed environment?

The hint (which I will explain in another post) is that a dark pool needs more than opacity to put up blocks or even good trades and that something “more” may force us to rethink the importance of milli-second, high-frequency trading. Can a slower, more methodical electronic marketplace that aggregates non-displayed liquidity and/or permits qualified negotiation be a more effective solution?

Maybe we need to stop focusing on trading volume statistics and start thinking about market functionality and quality. And what are the real mechanics behind best execution in a non-displayed environment?

Well, my eyes are tired, I gotta put another round of drops in my eye and my vision is blurry but I am kinda feeling that I am on the path to seeing things more clearly. Hopefully we all are….

Sorry I have been absent from the MatchPoint blog for a few months. I have been recovering from a detached retina and it is hard to write when you cannot see…but there is, I suppose, something fitting in a dark pool provider having a spokesperson who cannot see. Though I am beginning to realize that what we may see before us can often prevent us from seeing the real truth. So let me get started….

For many months now, dark pools have been all the rage. All we have to do is look at the volumes to see that between 500 million and upwards of 1 billion shares a day trade through dark pools. (Lord knows how much is actually posted or routed through these systems but are not executed.) There must be huge demand for these dark pools with that volume pulsing through them…but is this really true?

One of the major (if not the primary) reasons a dark pool is “dark” or non-displayed is so that users may submit large orders and cross large blocks of stock without impacting the market or causing information leakage. Makes sense, right?

Well, recently, Justin Schack at Rosenblatt Securities printed an excellent article called “Let There be Light”. He did a review of all the top dark pools. Of the 50+ dark pools, only three actually trade blocks of stock. See for yourself. They are Liquidnet (52,000 avg. trade size in May), Pipeline (~46,000 avg. trade size in May) and ITG Posit (~5,000 avg trade size in May). Every other dark pool had average trade sizes at or below 600 shares! Do we really need a dark pool to trade 600 shares? Hmm….

Which really begs the questions, are dark pools other than the three mentioned above really adding any value at all (simply rearranging liquidity for commercial purposes); or worse yet, are they doing harm by making it harder and more expensive for investors to find true natural block liquidity? And what can we learn from the three dark pools mentioned above that enables them to realize the promise of a non-displayed environment?

The hint (which I will explain in another post) is that a dark pool needs more than opacity to put up blocks or even good trades and that something “more” may force us to rethink the importance of milli-second, high-frequency trading. Can a slower, more methodical electronic marketplace that aggregates non-displayed liquidity and/or permits qualified negotiation be a more effective solution?

Maybe we need to stop focusing on trading volume statistics and start thinking about market functionality and quality. And what are the real mechanics behind best execution in a non-displayed environment?

Well, my eyes are tired, I gotta put another round of drops in my eye and my vision is blurry but I am kinda feeling that I am on the path to seeing things more clearly. Hopefully we all are….

NYSE MatchPoint is drawing near to the day when we’ll drop the flag for the first matching session — the after-hours match at 4:45 pm Eastern.

In January, we received SEC approval and rolled our platform into production. Since that time, we’ve been working feverishly to authorize and connect the backlog of NYSE members into MatchPoint. Every NYSE member firm and every major OMS/EMS vendor are engaged with MatchPoint in some form or fashion.

Building liquidity in a dark pool requires patience, focus, persistence, skill and a critical mass of participants. As NYSE MatchPoint gets all of its NYSE members (and their customers) connected, expect to begin seeing volume. Executions will print with an “N” and an “X” modifier to identify them as MatchPoint trades. Transparency where it is needed (post-trade) and anonymity where it is not (pre-trade).

If you are concerned about information leakage, execution control, block liquidity, and finding a truly natural contraside, NYSE MatchPoint’s exchange neutral, low cost and centralized trading environment is your perfect solution.

NYSE MatchPoint is drawing near to the day when we’ll drop the flag for the first matching session — the after-hours match at 4:45 pm Eastern.

In January, we received SEC approval and rolled our platform into production. Since that time, we’ve been working feverishly to authorize and connect the backlog of NYSE members into MatchPoint. Every NYSE member firm and every major OMS/EMS vendor are engaged with MatchPoint in some form or fashion.

Building liquidity in a dark pool requires patience, focus, persistence, skill and a critical mass of participants. As NYSE MatchPoint gets all of its NYSE members (and their customers) connected, expect to begin seeing volume. Executions will print with an “N” and an “X” modifier to identify them as MatchPoint trades. Transparency where it is needed (post-trade) and anonymity where it is not (pre-trade).

If you are concerned about information leakage, execution control, block liquidity, and finding a truly natural contraside, NYSE MatchPoint’s exchange neutral, low cost and centralized trading environment is your perfect solution.