CASTING LIGHT INTO DARK POOLS.

NYFIX is hoping that its recently launched dark pool will make the same splash on European shores as it has in the US. So far, competition is thin on the ground but that is likely to change over the next year. Chris Smith explains the group’s formula for success.

I know Euro Millennium has recently launched but can you please provide some background.

NYFIX was first established in the US in 1991, and in 2001 the business launched NYFIX Millennium, the US dark pool. Around the same time, we created a presence in Europe. We offer electronic trading software, FIX connectivity and execution services to the global financial community. NYFIX realised the importance of FIX technology early on and bought a FIX connectivity software firm called Javelin which was known as a pioneer in the industry. It had a suite of products including Appia, which is a high performance FIX engine. It was because of this background in technology that we were approached by a group of sellside firms who realised that the US market was changing from the traditional floor-based to a more electronic or upstairs (over the counter) trading environ- ment. They wanted us to create an electronic market system and as a result, Millennium was born.

What has been the impact of Reg NMS and MiFID?

Reg NMS was a key driver for the proliferation of dark pools in the US and although there are different figures out there, on average, the total market share of dark pools in the US is some- where between 5% to 10%. NYFIX Millennium, which matches an average of 50m shares per day, is one of the top dark pools. Trading in dark pools has really taken off. In 2001-2003, there was steady but not spectacular growth but in 2004, people ramped up their use driven both by regulation (like Reg NMS) and an increasing adoption of electronic trading tools and algos. The venues in the US each have their own value propo- sitions and strategies but we are definitely seeing an overall increase in the use of algorithms.

In Europe, MiFID was brought about to foster greater competition and a primary consequence will be the growth of alternative trading platforms including dark pools, although we do not expect to see anything like the number of alternative trading venues (MTFs in Europe) here as they have in the US.
I believe we will also see the buyside seek to take greater control of the way they execute their orders. They will utilise technology to enable them to create and operate different trading strategies for different orders. Market infrastructure innovation and the growth of dark pools as an example will enhance the choices the buyside have when it comes to executing their order flow.

Why was the launch delayed from last year to this past March?

We formed an advisory board of buyside and sellside firms and started meeting once a month from May 2007. From September, we recognised that if we launched directly following the introduction of MiFID, no one would be ready to talk to utilise the pool.

Our advisory board provided us with an invaluable source of product development input and in full consultation with them, we scheduled a Spring 2008 launch to ensure that our service would meet all of their requirements.

The involvement of our Advisory Board ensured that we would not fall into the same trap as many firms do, when they fail to recognise that subtle cultural and market differences can impact the success of bringing a service to a new market.
Our advisory board includes Allianz Global Investors, Baring Asset Management, BNP Paribas Securities Services, Citi, CA Cheuvreux, Credit Suisse, DWS Investments, Goldman Sachs, Insight Investment, JPMorgan Asset Management, JPMorgan, Merrill Lynch, Resolution Asset Management, Schroder Investment Management and UBS.

What, if any will be the differences between Euro Millennium and NYFIX Millennium?

We built the Euro Millennium service based on NYFIX Millennium technology, drawing significantly on our heritage and experience in the US . With both services clients can place orders which reside in the pool until they are matched, or they can choose to send pass-through orders, which sweep the pools for a match before being routed to another source of liquidity. In the US, this other source of liquidity is typically an electronic trading network or exchange. A major difference with Euro Millennium is that the other source of liquidity can be a preferred broker dealer. We made this enhancement based on feedback from our Advisory Board.

How do you see the Europe an developing markets in the wake of MiFID?

There are some clear parallels to the way the industry developed in the US initially, using the timeline I referenced earlier; I believe the first three years of fast growth seen in the US could be consolidated into a single year. We are going to see a revolution in the market in terms of trading with national sentiment slowly diminishing. We are already seeing that happen with the success of Chi-X, which I believe has been a trail blazer. Overall, there are likely to be a smaller number of pools because Europe was already an efficient marketplace. However, one critical potential inhibitor to development could be the lack of a central clearing and settlement system. There is movement happening on this front in Europe and I believe that the growth of the multilateral trading facilities (MTFs) will help to force change in the clearing and settlement infrastructures in Europe.

Although it is early days, how been the response to Euro Millennium?

The response from the market has been exciting and we are seeing a great deal of interest in linking to the service. With all new services of this type, it takes time for clients to adapt to the functionality of the service and build the appropriate tools to allow their traders to reach the pool. This has taken some time although it is now accelerating. The main reason has been technology resourcing with the buyside upgrading their order management and execution management systems. We are coming to the end of the tunnel and in the meantime we have been developing our product offering.

In addition to our success with Euro Millennium, we are also very excited about our recent acquisition of FIXCITY, a UK based specialist in web-based electronic trading and liquidity discovery solutions. Its flagship product is iodine, which is known for its IOI (indications of interest) analysis, filtering, and alerting capabilities. NYFIX plans to combine its IOI workflow expertise with FIXCITY front end technology which will enhance our client’s search for liquidity. The system is already being used in Europe and we plan to roll-out to other regions later in the year.

Can you give us more detail behind the SWX deal?

About a year ago we developed our business plan for Euro Millennium and one of our goals was not to be a club for a particular segment or platform. We see the Euro Millennium service as a truly open and complimentary venue to that of exchanges and other MTFs. SWX Europe was very interested in our vision because they were looking for innovative solutions to add and create new liquidity. We announced a deal whereby NYFIX Euro Millennium will power the Swiss Block service offering non displayed liquidity trading for Swiss blue chip securities. The service is expected to be launched in the summer of this year.