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Building A Buy-side Community

With Jeff Estella, Director of Trading Analytics & Investment Operations, MFS Investment Management
Jeff EstellaTo roll back the clock to October 2013, we were approached by Fidelity Trading Ventures regarding a new platform for trading. They were using some data to think about long-term institutions and the liquidity challenges they have with both traditional exchanges and with the different intermediaries that are in the marketplace now. They were asking if there was a potential to have an efficient platform that doesn’t have a profit motive to match buyers and sellers. One that could match long-term fundamental investors, in a single environment where it was possible to take the frictional element out of the equation.
Fidelity Trading Ventures approach 20+ institutions. After many months of non-disclosure agreements and meetings, nine firms were able to come together to form the consortium that would become Luminex. MFS got involved because this was focused around an opportunity to reduce the friction in matching buyers and sellers. We have a passion for innovation and change and wanted to help bring that to the market through our involvement in the consortium. Could this potentially help MFS’ clients? The answer is yes, but more importantly, it could help the entire marketplace. This is about the greater good for long term-focused investors.
The first milestone of success is already past us. We were able to get a significant number of long term-focused institutions to commit their names and their financial resources to this industry consortium, to creating what is essentially a utility. That in and of itself is the first milestone.
The next milestone is building out scale. Luminex continues to follow up with institutions it originally sought out back 2013 as well institutions that expressed an interest in participating on the platform after it launched. This system only works if the network is big enough. We need a diversified flow in there, with buyers and sellers in the same security at the same time, on an anonymous basis. While we’ve heard the speculation that if it is all long term-focused institutions that have a buy rating on XYZ security, there could be zero odds for Luminex to have the ability to cross the trade. However, we’ve found that the data shows that there is a diversified number of orders in the system at all times, on both sides of the trade.
We’re creating an environment with like-minded firms that are looking to trade on an institutional block level. They’re more focused on a fundamental view on a security. We think it’s a very attractive proposition if we can put two different long-term market participants together that have a different view on that security at that point in time, with the least amount of friction, relative to other peer-to-peer systems. One would think that those two institutions may consider using an offering such as Luminex.
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