Markets Multiplying in U.S. With Tripleshot, IEX VenuesSam Mamudi
In a country where stock trading is already divided among at least 50 venues and new entrants often fail, two firms see room for more.
Tripleshot LLC, a Boston-based alternative platform founded by a former executive of dark pool operator Pipeline Trading Systems Inc., and IEX Group Inc., led by Royal Bank of Canada’s former electronic trading chief, plan to start this year. Both say they have ways to entice buy-and-hold investors wary of the speediest traders.
For 15 years, software engineers, exchange veterans, hedge funds and brokerage executives have battled for pieces of the American stock market, where more than 6 billion shares have changed hands daily in 2013. While fragmentation helped give rise to high-frequency traders whose rapid-fire offers for stocks reduce costs and create liquidity, Tripleshot and IEX see an opportunity in trying to limit their involvement.
“It’s certainly an uphill battle for a new venue to gather scale and liquidity,” said Richard Repetto, an analyst at Sandler O’Neill & Partners LP. “It’s really about innovation. If there’s some new technology that will allow larger size trades to be done and at the same time attract the liquidity to get them done, it could be successful. But it won’t be easy.”
While the proposed markets differ in design, the goals at Tripleshot and IEX are similar. Each is trying to give investors alternatives to exchanges, such as those run by NYSE Euronext and Nasdaq OMX Group Inc., and a place where they can buy and sell stocks with a minimum of price movement.
Tripleshot, which says it has the support of money managers overseeing trillions of dollars, plans a system for matching bigger orders without revealing details before trades happen. The firm raised money from angel investors and venture capital firm Atlas Venture, according to Michael Hayes, the chief executive officer who founded Tripleshot in March 2011 after working at Pipeline from 2006 to 2010.
John Despotopulos, head trader at Lee Munder Capital Group LLC, said Tripleshot’s plan can succeed.
“You’re always skeptical when you hear a new idea, but for the first time in a long time, I was surprised to be surprised,” Despotopulos, whose firm manages more than $5 billion, said in a phone interview from Boston. “It’s the first system I’ve seen that allows us to put orders in without fear of giving up any information prior to the trade hitting the tape.”
The platform will decoy user intentions. When an investor’s order to buy or sell arrives, it will be sent into the pool simultaneously with requests for other companies’ shares. Details will only be revealed if a trade occurs. The minimum size will be between 5,000 and 50,000 shares, depending on the stock. All trades will take place at the midpoint between the bid and ask price, Hayes said.
“Tripleshot has the potential to succeed because we’re rapidly earning the support of the buy side, and we’re earning that support by providing them a simple way to search for a block with essentially zero pre-trade information leakage,” Hayes said in an e-mail.
Other crossing networks have failed to achieve enough critical mass. AX Trading Group LLC suspended its dark pool this year. The market catered to investors who trade small-cap stocks, with an average trade size of about 45,000 shares.
“The system did exactly what we wanted it to,” said Kevin Callahan, chief executive officer of Stamford, Connecticut-based AX Trading. “The challenge is how you differentiate yourself and the flip-side is how you get enough liquidity. I felt like we created a really differentiated offering that was value-added, but we struggled in terms of getting enough liquidity.”
Callahan said his team hopes to raise more capital and relaunch the dark pool.
“Now we’re looking at, how do we find ways to increase liquidity in our platform,” he said.
IEX aims to start its trading system in September or October, according to a person with direct knowledge of the matter who asked not to be identified because the details haven’t been publicized. The company plans for its venue to become a public exchange in the future, said the person.
Led by Brad Katsuyama, formerly the head of global electronic sales and trading for RBC Capital Markets LLC, IEX is pitching itself as a place where mutual funds can trade with each other and away from predatory participants. Among IEX’s strategies will be a charge of 9 cents per 100 shares for both buyers and sellers, pricing designed to make trading at fractions of a second unappealing, according to the person with knowledge of the matter.
Katsuyama declined to comment on IEX’s plans.
Clive Williams, head of global equity trading at T. Rowe Price Group Inc., said that should deter some high-frequency traders. Williams said there are questions about whether the venue will have enough buyers and sellers.
“How do you replace someone who makes up a large percentage of your volume?” Williams said. Rosenblatt Securities Inc. estimates about half of all U.S. stock volume is conducted via high-frequency trading firms.
Jay Fraser, managing director and head of Autobahn Americas at Deutsche Bank AG, said he supports IEX. Deutsche Bank is one of the first broker-dealers to publicly back IEX’s model of discouraging speed-driven trading from its platform.
“We’re excited to be one of their partners and supportive of the simplicity of their model that allows clients to designate a specific broker,” said Fraser, who added that several Deutsche Bank clients have told him they want the firm to send parts of their orders to IEX.
Williams said Baltimore-based T. Rowe, with more than $600 billion under management as of March 31, will look closely at both Tripleshot and IEX once they start operating. He said that Tripleshot’s model was something he hadn’t seen before.
While the market already has some venues in part or wholly focused on large transactions, each claims only a fraction of a percent of daily trading.
Tim Mahoney, CEO of Bids Trading LP, said in a phone interview that about 30 percent of his dark pool’s trades are blocks, with an average size of about 30,000 shares. The dark pool had a 0.56 percent share of average U.S. daily volume in May and an average trade size of 264 shares, according to data compiled by Rosenblatt.
Bloomberg News parent Bloomberg LP bought a stake in Bids Trading last year.
Another dark pool that encourages block trading is Investment Technology Group Inc.’s Posit, founded in 1987 and one of the first institution-focused trading venues. In May, Posit’s average transaction size was 3,000 shares, according to Rosenblatt, and the firm estimates that about 30 percent of the volume was from Posit Alert, whose transactions average 32,000 shares. Posit’s market share in May was 0.73 percent, said Rosenblatt.
A trading venue that only lets large institutional money managers trade with each other “has a natural cap,” said Mahoney. “I don’t know whether the buy side is a natural, short-term provider of liquidity to others in enough frequency to be successful.”
One of the most successful investment fund-focused venues is Liquidnet Holdings Inc., which started its dark pool in 2001 and says it now has more than 700 asset manager clients trading in 42 markets, with an average trade size of 42,000 shares. Its share of average daily volume in May was 0.34 percent, according to Rosenblatt. CEO Seth Merrin said there is demand for venues such as his because large investors aren’t adequately served.
“The public exchanges don’t cater to institutional, and most of the dark pools are really just shadow exchanges,” Merrin said.