Lehman, Merrill Trading Platforms Likely to Live On
September 22, 2008
The currents of the electronic trading world's order flow may be shifting in the wake of Lehman Brothers' bankruptcy and Bank of America Corp.'s deal for Merrill Lynch & Co. last week. However, the trading platforms of those investment banks--and any other bulge-bracket firms that meet unexpected demises in the current crisis--are likely to find welcoming homes.
Lehman Brothers was a major force in electronic trading, offering leading-edge algorithms and a dark liquidity pool and holding stakes in several other venues. It will become clearer in the coming weeks what Barclays intends to do with Lehman's U.S. broker-dealer assets, which it acquired Sept. 17 through the U.S. Bankruptcy Court in the Southern District of New York, but the U.K. bank clearly will elevate its status in the electronic execution business.
Barclays Capital's PowerFill algorithmic suite is well known for connecting to a wide array of global markets, especially in derivatives. However, it is a relatively small player in the U.S., where Lehman's LMX Trading Strategies is among the top algorithmic suites. Lehman's algos also have a global reach, but they are strongest in the U.S. equities market and are designed to access the growing number of execution venues there, both displayed and dark.
Barclays also picks up the Lehman LX dark book, which trades U.S.-listed stocks and has grown rapidly this year, executing an average of 51 million shares a day, according to Rosenblatt Securities. "Put all those pieces together and Barclays may have a very broad, global electronic trading business," said Adam Sussman, director of research at New York-based Tabb Group.
In June, Lehman announced a deal with the London Stock Exchange (LSE) to collaborate on Baikal, a pan-European dark book slated to launch in the first quarter next year. At the time, an LSE spokesperson said the exchange was developing the matching engine, while Lehman would apply its anti-gaming technology to root out opportunistic traders. A Barclays spokesperson declined to comment last week on how the bank will deal with Lehman's commitment to the new dark pool.
LSE, however, is planning to move forward with the project. "Since we announced it, we've had 80 meetings with institutional investors and brokers, and they're all very excited about the concept of Baikal, both as users and potential investors," an LSE spokesperson said. "We're confident it will continue."
Biggest Retail Brokerage
Merrill Lynch, which Bank of America agreed to buy on Sept. 15 for $50 billion in stock, also offers a high-profile set of algorithms, and its MLXN dark book has experienced healthy growth this year. The transaction will add 17,000 brokers to Bank of America-the nation's largest commercial bank and second-largest brokerage-making it by far the largest U.S. retail brokerage. That retail flow is especially attractive to institutional participants in dark pools, suggesting that Bank of America may retain MLXN.
However, the bank began trimming its investment banking and trading divisions earlier this year due to sizable losses stemming from subprime mortgage loans, which raises questions about its plans in the trading arena. "We won't know for some time how the company will look after putting the two pieces together and what, if anything, might be sold," noted Bank of America spokesperson Robert Stickler.
