BNP Paribas' Big Plans for Dark Pools
Platforms planned in North America, Europe, Hong Kong
March 24, 2008
BNP Paribas, well known for its global reach and offices in 88 countries, is seeking to add dark liquidity expertise to that reputation--by the end of the year, the French bank aims to have four non-displayed trading platforms in operation across the globe.
The global execution services (GES) group in the firm's corporate and investment banking division says it plans to launch an internal crossing network in the U.S. before the end of the second quarter and one in Europe by the end of the third. The bank launched its first hidden liquidity destination--BIX, or BNPP Internal Exchange--in Tokyo last summer and has plans to introduce one in Hong Kong in May. All four will use the BIX moniker.
The firm hopes that several factors will distinguish its efforts from the ever growing list of non-displayed alternative trading venues. Following an East-to-West rollout schedule, BNP plans to first take advantage of recent heightened trading activity in Asian markets. Though the BIX platforms will match the most aggressively priced orders first, when there are multiple orders at the same price, the largest will take precedence and get the largest portion of the trade. And BNP is permitting trades not only at the bid, ask and midpoint but also at 25 percent and 75 percent of the spread.
"Many dark pools let you trade at just the midpoint," said Rich Steiner, director of GES and head of product development for direct-market access and algorithmic sales in New York. "We think it makes sense to offer other choices and to allow people to trade more on their own terms, letting them peg to a quarter or three-quarters of the spread."
Steiner said the firm came up with the five-point trading option because of the tendency for wider spreads in Asia, as well as BNP's desire to attract maximum liquidity. "We are trying to maximize the number of strategies you can interact with," he said.
While Steiner noted that some might categorize BIX as a call, or point-in-time, market that attracts liquidity around various matching points, aggregates it and then matches buyers and sellers, he said that isn't entirely accurate. Instead of conducting matches at a predetermined time, the BIX venues are aggregating liquidity at certain price points.
Smaller Orders
BNP expects that the BIX platforms, which will allow algorithmic trading, will not focus on block order flow but rather much smaller trades. They won't connect to dark pools run by other broker-dealers, set minimum order sizes, or employ maker-taker pricing--charging traders who take liquidity and providing rebates for providers.
"Pricing will depend on how you are getting to us," Steiner said. "If you are getting to BIX via algorithms, you get an algorithm rate. If you are coming to us directly and want to be in BIX, we will price on either a per-share or basis-point basis," though this could change over time, he noted. BIX will not offer priority access to trading partners who wish to have first look at the flow, added Steiner.
How does BNP expect to attract liquidity amid proliferating dark liquidity pools and complaints from the buy side about a fragmented marketplace? Steiner says he anticipates BIX gaining business because of the firm's "unique" order flow. "We have our private banking, retail, proprietary, facilitation and derivatives hedging order flow--and all of that stuff is unique," he said, adding that, according to internal calculations, BNP Paribas is responsible for 4 percent to 5 percent of U.S. equity market executions and is the third-largest trader of Dow Jones stocks.
