Global Market Structure
Exchanges' Crossing | Asia's Alternatives | UBS's Leibowitz: On the ATS Front Lines | Harris: A Microscope on Microstructure
Exchanges' Crossing
May 14, 2007
The crossing initiatives by the major exchanges, which will unfold over the next few months, are also defensive. They offer themselves as anonymous venues to execute large block trades and recapture liquidity that has shifted to dark-book competitors by providing their own anonymous destination to execute trades.
The Nasdaq Crossing Network, scheduled to launch in June for all exchange-listed stocks, will offer three intraday crosses, starting at 10:45 and spaced two hours apart, as well as a post-close cross at 4:30. NYSE is taking a more measured approach, anticipating its introduction--initially a post-close cross that's likely to expand later to include intraday sessions--in July, according to Jim Ross, VP of crossing technology at NYSE and the founder of MatchPoint Trading, which the exchange acquired last July to power its service.
In the tight-knit world of crosses, also referred to as calls, Ross began working for Instinet in 1989 when it provided the only post-close cross. At that time, the Posit Match at Investment Technology Group (ITG), which was founded in 1987, was the only intraday cross. Instinet, formerly part of Reuters Group and now a subsidiary of Japan's Nomura Holdings, has maintained its post-close cross while introducing three intraday crosses. "We're probably going to increase the times shortly," said Michael Plunkett, president for North America at Instinet.
ITG tightly integrates Posit Match with seven-year-old Posit Now, which provides continuous matching, and Block Alert, a two-year-old initiative allowing for more negotiation among institutional users and tighter integration with order management systems. There are 13 daily crosses on Posit Match.
"We've experimented with more and fewer," said Chris Heckman, managing director and co-head of sales and trading at New York-based ITG. "We're constantly trying to figure out what makes sense for clients." He said that the frequency of crosses varies through the day, tied to peaks in market volume that are more prevalent earlier in the day. He added that the firm does not intend to increase the frequency in the foreseeable future.
Building on History
Crosses are far from new. Even Nasdaq and NYSE have had opening and closing crosses for years, and NYSE also has a post-market cross--all of which will continue. Some names that are now defunct--Arizona Stock Exchange, Optimark and Chicago Match, to name a few--represented attempts to create platforms for anonymous block trading that never quite caught on. A new generation of dark, or undisplayed, liquidity pools, including Liquidnet and Pipeline Trading Systems, emerged in their place in the current decade.
Cost has become a major determinant as commissions have plummeted. Will Sterling, head of direct execution at UBS, noted that while the exchanges and electronic communications networks (ECNs) charge a few hundredths of a cent per share, the most aggressive fee among call markets is $0.005 per share, though they are more typically between one and two pennies.
The Nasdaq Stock Market charges $0.003 per share, so on the surface its fee would appear to be more than half the penny cross fee and a third of the penny fee--less expensive but not excessively so. Sterling notes, however, that Nasdaq rebates $0.002 for providing liquidity, the other side of the trade, so the exchange's revenue is cut to $0.001. Because an exchange has a buyer and a seller, it is actually making $0.0005 per share, or significantly less than what crosses have traditionally charged. Therefore, said Sterling, "crosses usually charge 10 to 20 times what the ECNs and exchanges charge."
