This February, electronic agency broker ITG announced that it would be opening its Posit Now ATS in Europe, becoming the latest in a growing list of alternative execution venues to open its doors in London over the past year.
Posit Now is a continuous crossing system for cash equities that will enable users to look for matches whenever they feel like it, instead of having to wait for one of the eight scheduled daily matches on Posit Match to occur.
Matching orders are crossed at the midpoint price, offering users a 50% saving on the market’s bid-offer spread. The new system will cover all 9,000 stocks across 15 countries available on Posit Match.
"The two systems are complementary," says Alasdair Haynes, CEO of ITG in Europe. "The market structure has changed considerably over the last nine years since we launched Posit Match in Europe. The system works well for small, less liquid stocks where it’s difficult for people to use algorithms but people now have a greater need to trade much more frequently and more quickly. For larger and mid-cap stocks the opportunity cost of having to wait for the scheduled cross was becoming too high for many clients. Posit Now takes away the cost of those delays."
Dark liquidity
Like Posit Match, Posit Now, which has been operating in the US for about a year and half, is an attempt to give traders access to "dark liquidity" – all those trades that investors and brokers are prepared to do but that are unknown to the market, by giving them anonymity and allowing them to hide the volume of their orders.
The offering follows hard on the heels of a number of other recent alternative trading venues that have launched or announced plans to launch, including Instinet’s Chi-X and Project Turquoise. It also joins several other alternative venues that have been around for a while, such as Liquidnet, Virt-X, and the London Stock Exchange-focused PlusMarkets.
Competing against established exchanges, however, is hard and although some of these players have been highly successful in the US, in Europe they are so far only surviving and have yet to cause anyone other than their own investors to lose any sleep. Volume growth on Europe’s main exchanges has continued to keep pace with if not outstrip the new competitors.
"The problem," admits an electronic trading expert at a bulge-bracket investment bank, "is that the exchanges in Europe actually do quite an efficient job. Alternative venues made a big inroad into the US market because the market, thanks to the specialist system, was so awful that there were a lot of incentives to use alternatives. The exchanges in Europe certainly have their faults, they make far too much money out of us, but there is not much wrong with how they run their order books."
In the US, brokers keen to avoid the fees charged by exchanges have taken things into their own hands by setting up in-house crossing networks that internalize liquidity to the extent that the largest brokers cross at least as much as any of the big external networks.
In Europe, however, the Markets in Financial Instruments Directive means that that is unlikely to happen. "Mifid contains as many barriers to crossing as it provides access gates," says Jeromee Johnson, senior researcher at the Tabb Group. "In addressing systematic internalization by firms and transparency in Mifid, concentration rules will be abolished and internalization will be subject to new rules. Rather than becoming an internalizer, firms will set up their own multilateral trading facility or join a consortium like Project Turquoise announced by seven major global investment banks to create a pan-European execution facility."