New Ideas on the Block

ASK THE BUY SIDE

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Waters: Is there any market space left for new crossing networks or block-trading ECNs?

Carl James, Henderson Global Investors:

In the next three years, you're going to see an increase in the number of execution platforms. Whether those are agency platforms or crossing platforms, I'm not certain. Ultimately, there will be a consolidation and we will probably end up with two or three networks. I also expect that the way they'll cross will change. There's one model out there that crosses continuously and another model that crosses at specific times during the day. People want to cross at any time rather than waiting for specific times. Those who are crossing at specific times are thinking about changing it.

Waters: Nasdaq has increased the crossing opportunities on its stock market. Do you see an exchanged-based crossing challenge to the independent crossing networks?

James:

 I don't believe so. I like the models in which you have buy-side-to-buy-side crossing and that's appropriate for some order flow. There is other flow where it's appropriate to go through a counterpart that may have corporate contacts or capital commitments. Clearly, the landscape is evolving. I certainly don't advocate that all business should be crossed through a blind crossing network. However, I would like to do more of my business through a crossing network. The more that I can cross, the less market impact I'll have.

Waters: Are the European markets being served as well as the North American markets when it comes to crossing and block-trading ECNs?

James:

Definitely not. There is a big difference between what goes on in the US and what happens in pan-Europe. I'd like to get closer to the North American model.

Waters: Looking at the various crossing network models, are there any that you find less attractive?

James:

 You want to make sure that the traders have as much control over the order as possible. What we want to be able to do is have access to the various different levels of liquidity, whether it is capital commitment, algorithmic trading or a crossing network. There are some firms out there that want to capture your whole order, so they download the entire order. In order to see the liquidity on the crossing network, you have to submit a live order to the crossing network. I don't see why I need to download my whole blotter.

Waters: If you could design your own crossing network, which features would you include?

James:

I would do it with two crossing networks and just keep them simple. The first network would be a buy-side-only crossing network, which would be policed for spoofers trying to open people up and then walking away from the deal. There are two models out there today and both are good. With Liquidnet, for example, you can get people gaming the system. If you go to ITG's Posit, which has hourly crosses, it's good, but it's blind and the trades are done at the prevailing bid. You really want to blend the two models. The second network should have sell-side participation, which could be tricky territory. It should be completely blind. You enter orders at a specific time, maybe every five minutes or whatever is appropriate, and you also have the crossing completely blind.

Waters: Would these models radically change the current playing field?

James:

 They would. There are two levels here. First there's the Financial Services Authority's CP176 directive on soft dollars and unbundling of services. As true unbundling happens, this becomes a more interesting conversation. If you get true unbundling the traders become completely unrestrained in where they can deal. They have to prove—and this is where MiFID comes in—that they are actively seeking out the best prices where the liquidity is located. There is some liquidity on the crossing networks, so I'm going to have to show that I am using them not only to their clients, but also to the regulators.

Waters: How much of your trading volume do you put through the crossing networks and block-trading ECNs on a regular basis?

James: We do less than one percent through the crossing networks at the moment, but we're deep in technology implementation and I want to increase that rate.

Waters: Which technology are you implementing?

James:

 We have been using Charles River Development's platform for about four years now. We're on the current version of the system and are preparing to go to the next release that's expected in the first quarter of this year.

Waters: Does your current configuration allow for easy integration with the various crossing networks?

James:

The next version will make it easier. That's one of the things that we're speaking to the vendor about. We are participating in the user group that says, "It would be useful if you did ..." and one of those was ease of FIX implementation for connectivity.

Waters: Has your firm integrated any crossing networks with its OMS?

James:

No. Currently there are three ways that you can integrate with a crossing network. You can say, "Here's an order, please put it into your network." You can pull up their Web site and type it in or, if you had FIX, send it by FIX. The third way is the best way.

Waters: When you deploy the most recent version of your OMS, do you see your firm sending orders to other crossing networks?

James:

Speaking from the 10,000-foot view, it is clearly a good idea if we can cross our orders. The future role of the trader will include new responsibilities. Right now, we have to monitor the execution quality. How do we do that? We have to be smarter in accessing the pools of liquidity. If we can get to those pools of liquidity then our efficiency, in the terms of your effectiveness, in executing orders has to be better.

Waters: This all boils down to quality of execution?

James:

Yes. There are a number of studies being done that highlight how giving traders greater freedom to execute where they think is best adds value. My view is the greater the freedom the traders have to execute the better the executions will be. When I say "better execution" that means it would be measured through the ability to get hold of liquidity and ultimately measured through trade cost analysis.

Waters: Currently, you're linked to ITG's Posit. After implementing the OMS upgrade, will you connect to all of the other crossing solutions?

James:

Yes, but you can't split things too far. It's just making sure that there is enough liquidity on these venues.

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