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Making Liquidity Work

By Clive Williams, Global Head of Equity Trading, T Rowe Price
Clive WilliamsWe joined Luminex partly because there are a large number of ongoing regulatory challenges around dark pool trading, and we needed a new venue to trade how we wanted. One difficulty we see is that dark pools are not really dark, they are more grey. The one thing that we have always argued is that dark pools should be for blocks, and there should be no leakage of information. That is where Luminex can come in and be advantageous; we have a minimum fill size of 5,000 shares, we have price improvement. It ticks all the boxes for us and gets back to that more instinctive feel of what a dark pool should be.
However, the challenge for any new venue is attracting enough initial users. Luminex does not have the client base that, for example, Liquidnet has. They have 450 and we’re closer to 150. Integrating new firms and their execution management systems takes time, and building that critical mass is a big challenge.
But the growth will occur because much of the reason behind Luminex comes back to how firms want to use a dark pool. Firms should feel comfortable in resting an order in a dark pool. If a desk is just pinging a pool, the chances of them actually hitting a contra order are very small. The system is only going to be able to operate if people are comfortable putting flow in there and letting it rest. That’s the problem with the market as it currently stands as it has got so short term that people aren’t properly using dark pools; people want continuous execution and it is a challenge to change that mind set.
We would rather, if a trader had liquidity that wasn’t doing anything, they would reside that order on a pool where we have the potential to find a contra and do a block size trade rather than just leaving it on the blotter doing nothing. Luminex is building out the clients that have a similar approach; we have been pretty clear as to who we’ll accept on the system and who we’ll not accept.
This is partly why Luminex is purely focused on the US right now as well. We have to get the US right as we have to learn to crawl before we can walk. Given all of the regulatory changes, even just examining the ongoing information coming out of Europe, the caps on dark pools that are within MiFID II for example, it is all very unclear and the implementation deadlines are rapidly approaching.
I understand that if a firm is a European asset manager or trading European equities, they want more options to execute block sized trades, because the options in Europe are less than in the US. There’s the desire for Luminex to therefore move to those markets, but it’s a matter of getting the capacity right in the US first and then we can transport a more finished model.
Obviously there is a large regulatory drive in the US talking about transparency and routing and the buy-side gaining a better understanding of that. The one problem the buy-side may have overlooked is that if we ask for the data and we get it, we need to put in the effort to understand what that data is telling us. It’s not just a box ticking exercise. The buy-side is going to have to make some investment to try and understand their trade data and how they can effectively use the data; e.g. how smart order routers operate, and having a deeper understanding of market structure follows from that.
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