Rolled out across 15 European markets and 9000 equities, the move to continuous matching is a natural extension of ITG’s eight-times-a-day Posit Match service (originally twice-a-day). ITG claimed the new system’s anonymity and confidentiality would prevent information leakage, thereby eliminating market impact - from execution to post trade – and driving growth in crossing. It added that a 50 per cent saving on the bid-offer spread was gained by crossing orders at the mid-point price of the underlying market.
Alasdair Haynes, CEO of ITG Europe, contended that as the buy-side becomes more comfortable with using ‘pure’ crossing “latent liquidity from institutions should be driven out.”
The new system, he said, was also a response to “strong client demand”, while articles 17 and 21 of the Markets in Financial Instruments Directive (MiFID) were a driving factor. Article 21 outlines requirements for best execution and an “obligation” to look for all forms of illiquidity, such as ‘blind’ or anonymous crossing with counterparties at the mid point of the bid/offer spread.
According to ITG, crossing networks can help reduce transaction costs in comparison with normal exchange transactions, since average trade size is decreasing due to electronic trading and total costs for a block trade are actually rising since the number of transactions to clear the trade size is going up. Continuous crossing means no more waiting and potentially improves crossing ‘hit’ rates. Improved electronic connectivity (for instance, use of FIX) over earlier years should drive crossing.
Pointing to predictions by researchers, Tabb Group, that the US market will witness a 22 per cent surge in daily equity trading volumes in 2007 to 512m shares, Mr Haynes remarked: “We can expect a more than doubling in volumes in Europe…potentially reaching the 5 per cent mark in a year.”
Not all crossing networks are the same. ITG’s Posit Now is touted to buy- and sellsides, while Liquidnet, which entered Europe in November 2002, operates a buyside-to-buyside only model focusing on matching large orders.
Tabb highlights that the volume of shares traded on private systems owned by investment banks, as opposed to public exchanges, is set to surge in Europe and the US. In Europe, dark pools and crossing networks collectively captured around 2 per cent of all equity trading (approximately 10 per cent in the US).
Private systems and branded internal “dark pool” systems of recent years (2006), include Morgan Stanley’s ‘Pool’, Goldman Sachs’ ‘Sigma X’ and UBS’s Price Improvement Network, and a consortium of banks including Goldman Sachs-backed Block Interest Discovery System (BIDs).
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