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NYSE and BIDS to end block trading joint venture

Traders work on the floor of the New York Stock Exchange in New York December 20, 2012. REUTERS/Andrew Kelly
Traders work on the floor of the New York Stock Exchange in New York December 20, 2012. REUTERS/Andrew Kelly

By John McCrank

NEW YORK (Reuters) - NYSE Euronext plans to shut down the New York Block Exchange, a joint venture with dark pool operator BIDS Trading for executing large "block" trades because of a lack of market interest.

The Big Board parent, which is being bought for about $8.6 billion by IntercontinentalExchange, has been focused on cost cuts amid a marketwide slump in trading volumes, said in a regulatory filing it will close the NYBX electronic trading venue at the end of February.

NYBX was launched in 2009 with the aim of allowing members of the BIDS ATS (Alternative Trading System) dark pool to anonymously access displayed, reserve and undisplayed liquidity on the New York Stock Exchange for block trades.

A block trade is technically an order of at least 10,000 shares, or an amount of stock that has a value of at least $200,000, though NYBX did not set a minimum amount of shares per order. Large trades are often done in dark pools because the orders are undisplayed, or "dark," minimizing chances for the market to move against them, as they might in a "lit" market.

Traditionally, when block trades were done on physical trading floors, they were private deals between two parties and the trades were often executed outside of the national best bid and offer price (NBBO).

ATSs, like BIDS, are electronic venues that offer large buyers and sellers places to execute trades with prices referenced to the displayed NBBO in public markets.

One of the reasons NYBX was formed was to enable trading outside of the NBBO, as was normally done in years past, while having access to the liquidity of the New York Stock Exchange, Tim Mahoney, chief executive of BIDS, said in an interview.

But members of BIDS, which is owned by NYSE, along with a several banks and financial companies, did not gravitate back toward that model.

"The market has evolved to a place where that type of transaction isn't really needed any more," Mahoney said. He said the current market structure has driven a lot of block liquidity to inside of the publicly displayed spread.

While NYBX failed to attract a critical mass, BIDS ATS had a record year in 2012, trading 73 million shares for a five percent increase in volume, while the overall equities market was off by about 17 percent, Mahoney said.

Another reason for the lack interest in NYBX may be that traders have become more comfortable with electronic trading, where algorithms are used to break up orders and send them out over a given period of time, rather than trying to sell a 50,000 share block in one trade, said Keith Ross, CEO of PDQ ATS.

NYSE has been losing market share for years to dark pools, which aside from ATSs, also include market makers like Citadel and Knight Capital Group that execute orders from brokerages internally, among themselves, cutting out the exchanges.

Still, NYSE said it will continue to work with BIDS.

"We valued our collaboration on NYBX, and are very pleased with BIDS' success in making block trading more efficient," said Larry Leibowitz, NYSE's chief operating officer. "As an investor in the company, we will continue to work with BIDS to explore opportunities that address client needs."

Other dark pools include Credit Suisse's Crossfinder, Goldman Sachs Group's Sigma X, and Liquidnet. Fidelity Investments' trading arm launched an invitation-only dark pool for block trades in December that allows institutional investors to interact with orders from Fidelity's brokerage business.

Aside from NYSE, BIDS' investors are Bank of America Merrill Lynch , Barclays , Citigroup , Credit Suisse , Deutsche Bank , Goldman Sachs , Morgan Stanley , UBS AG , JPMorgan , Lehman Brothers Holdings Inc, Bloomberg, and Knight.

(Reporting By John McCrank; Editing by Kenneth Barry)

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