With Jonathan Clark, CEO, Luminex
Increasingly we are seeing the buy-side take more responsibility for its orders – how they’re handled, where they go, who sees them and so on. In order to fully understand this, it is important to step back and consider the origins of Luminex; why it was set up and what it is trying to fix.
Luminex was born out of the question of how could we address market structure issues related to efficient sourcing of block liquidity, and whether we could help address these issues by creating a buy-side utility. The vision was for a buy-side owned and operated platform, not driven by profits, but simply by the notion that the buy-side could offer a more transparent and cost-effective solution by creating a community of likeminded high-quality firms that shared the same objective. Could they come together and put their flow into a platform to trade with one another and do it at effectively utility prices?
Ideally it would be self-sustaining and would save execution costs to the clients. In addition, there were already frustrations with ‘traditional’ block trading. Traders were having a hard time trading blocks and they were concerned that when they did send block orders to trade, there might be transparency issues, and the possibility of information leakage with orders that could make the markets move away from them before they could get their order filled.
These kinds of transparency-related issues led to the effort to “raise the bar” by creating a platform where the buy-side could trade with increased trust and confidence. Luminex was being founded at the same that many of the ATSs were facing issues; there had been sanctions, and some had been fined and were effectively forced to close, so there were certainly growing concerns that we felt needed to be addressed from a confidence point of view.
At that time, I was on the buy-side at BlackRock and was part of the initial group that had been approached to go out to the community to find out if there was a consensus about these issues of concern. Nine firms ultimately offered to work together towards solving these difficulties, and committed to funding the initial start-up of Luminex. The platform was announced in January of 2015, and we went live on 3 November 2015. We have been very pleased with the results so far.
There are a variety of ways of calculating success of any given ATS platform. I know most people would use volume figures from the start, but that isn’t the best way to look at Luminex. It’s important to note that Luminex is open only to asset management firms with more than $1 billion in AUM and a focus on long-term investing. We have a strict minimum trade size of 5,000 shares. We don’t allow broker dealers or high frequency traders to participate either, so comparing us by looking only at volume numbers misses the point, to a large degree.
I look at different metrics, particularly average print size. Today, our average print size is about 32,000 shares per print, which is a very good number because it means we’re doing what we set out to do – allowing people to trade large blocks. The top quantity that’s coming in (that is, the order that traders are sending to us) often exceeds 150,000 shares per order. So there is certainly a commitment to trade which is good to see but we are also pleased with the trend of growth. However, it is also challenging because changing trader behaviour is very difficult and requires our sales team to be in touch with clients on a daily basis. This means they have to travel to meet with the clients and ensure they are comfortable with the platform. We appreciate that this will not happen immediately, and that it will take time to develop further.
What we are doing is trying to change the conversation we have with firms. Firms that expect immediate volumes or instant success, those that ask “I sent an order, why didn’t I get it filled immediately?”, will have a more challenging experience on the platform. Those firms that understand what we are trying to achieve are the firms that will have the greatest success. When we communicate with them, because they’re sending in multiple orders a day, they are resting their order for a good duration of time; they are ultimately the ones that will have the most success.
A firm that sends in one order per day or maybe one a week in some esoteric name, will have a much less positive experience. It is our job to convince them that if they want to improve their chances of a hit, they should change that pattern of behaviour, and that just takes time and patience, and our Board recognised that this is going to be a long term build, and we’re funded that way.
We have found, on average, over 50% of the prints that occur here will end up being a top five print on the day in a given security. This is a good way of looking at a metric that most often, people don’t tend to think about. It is a wider conversation than just headline volume figures and ultimately, we want to trade large blocks that are meaningful. After only six months, to have half of our prints be in the top five prints for the day means we have had an immediate impact and we are doing what we promised we would do for the sourcing of block liquidity.
I’m not prepared to denigrate the continuous market. In most market centres around the world, there are very efficient means to execute order flow, but it’s also a very efficient means of executing smaller lots. With that in mind, those firms (especially bigger institutions that need to move larger pieces of stock) are going to need other pools to do that and the open market isn’t really the most efficient place to execute large blocks of stock.
What we are trying to argue is that we are a clean, healthy and effective platform for traders to consider when looking to trade blocks. There are of course other ATS providers that do offer block services, but what we are trying to do is distinguish ourselves in a variety of ways. As I mentioned earlier, our pool, in effect, is solely the buy-side community. Our platform comprises investors with a long-term investment horizon and therefore proprietary flow, market makers, HFT etc; are not in our pool.
Other pools have a number of different participants in their pool, while we are trying to maintain a very tight-knit community where people can feel comfortable trading. However, I’m not going to dismiss equity markets and market complexity, because again, it is a very effective way of trading smaller orders in a continuous fashion.
Our average order size is in stark contrast to that of many ATS operators. Their volume statistic – the average sales size, average order size – looks a lot like exchanges, around 300 shares vs. our 32,000 shares. This is a completely different model than many of the broker-dealer sponsored dark pools.
Ultimately, however, traders have to come equipped with the right mind-set. It is our job to remind those who are only concerned with volume figures of the full story, so that they can re-engage and continue to move along the path towards success.
We have a number of European clients who trade US products from European soil, and we are continuing to expand our focus in this area and I hope to see that number continue to grow over time. The reception has been very positive so far, and we are going to spend some more strategic time in that market to explain the benefits of trading through Luminex.
During those trips to Europe and when speaking to global managers here in the US, we are being asked when we will launch a European equivalent, whether it’s in the UK or mainland Europe or possibly even Asia or Latin America. We definitely see an opportunity to do more with our platform over the long term, either as relates to foreign equity markets or other asset classes, but those are longer term opportunities. In the short term, the Board and our team are focused on getting Luminex established as a consistent, successful platform here in the U.S. Getting it right here is what’s critical and, six months in, we are all focused on smoothing out the wrinkles you deal with in any start-up and continuing to build our customer base. If we demonstrate success here, we’ll keep an open mind about what other geographies or products make sense expansion-wise.
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