30 October 2007

NYSE Euronext agrees block trading link-up

NYSE Euronext yesterday announced its second significant partnership with banks in the past week. The exchange expects the move to revitalise the trading of big blocks of shares on both sides of the Atlantic.

The model unveiled by the exchange is the same as that outlined for Project Turquoise, a European initiative also backed by investment banks, which aims to compete with the region’s exchanges.

That NYSE Euronext has developed a similar business model suggests that the concept of what constitutes on-exchange trading may be undergoing a radical shift.

Equities trading has splintered into smaller parcels as electronic systems and automated trading strategies based on computer programs have flourished.

Investors seeking to deal in large blocks of shares have had to turn to private trading networks that hide bargains from public view until after they are completed – known as dark liquidity pools. The dark liquidity pools grab business from established exchanges and their largest customers, the brokers.

On Tuesday NYSE Euronext said it would form a joint venture with BIDS Holdings, the parent of Block Interest Discovery Service Trading, an alternative trading system formed by some of the US’s largest brokerages that allows the anonymous electronic trading of 10,000 or more shares in a company.

Last week, NYSE Euronext announced the creation, with BNP Paribas and HSBC, of Smart Pool, a platform that will facilitate the trading of large blocks of shares in a single company.

“We thought that the NYSE would look to buy outright a dark pool this year, but it looks like they are electing to partner and work with these unquoted markets that are doing very well,” said Brad Bailey, analyst at Aite Group.

The combined market share of independent block trading platforms and the broker-owned platforms that allow clients to trade privately was about 15 per cent of the US equities market as of the third quarter in 2007, according to Aite.

The planned joint venture will be open to all NYSE members and accessible through BIDS Trading.

Duncan Niederauer, President and co-chief operating officer of NYSE Euronext, said yesterday that the joint venture was convened “in response to feedback from our customers, as block trading has become more and more fragmented”.

BIDS is owned by a consortium of banks including Bank of America, Bear Stearns, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Knight Capital Group, Lehman Brothers, Merrill Lynch, Morgan Stanley and UBS.

By Michael Mackenzie in New York

© Financial Times