Block-trade dark pool gets noticed

The launch of Luminex, a U.S. equity dark pool run by nine large money managers, might have made only a ripple in trading volume, but observers said it will set off big waves in institutional trading.

Luminex Trading & Analytics LLC CEO Jonathan A. Clark said the Boston-based trading venue, which started operations Nov. 3 with about 60 participants, now has nearly 100 clients with more being sought.

Other sources said the block-trading market targeted by Luminex always will remain small compared with overall U.S. trading volume, but the impact on institutional trading in how large blocks are moved will be big — and other dark pools will take notice.

In its first four days of operation, Luminex executed 299 trades in a total of 11.45 million shares, according to data from the Financial Industry Regulatory Authority Inc., Washington. That pales in comparison to the top-executing venue for the week of Nov. 2 based on total share and trade volumes — UBS AG's ATS, with 3.66 million trades involving 570.13 million shares. (FINRA alternative trading system data lags two weeks; for the week of Nov. 16, Luminex executed 128 trades involving 3.03 million shares.) Despite the relatively low numbers, Luminex's volume was impressive, said Jamie Selway, managing director and head of electronic brokerage at Investment Technology Group Inc., a New York-based dark pool and financial markets technology provider.

“It's definitely early days,” Mr. Selway said. “But I think the launch went better than even they might have expected. I don't want to speak for Luminex, but as an outsider, the launch exceeded expectations, particularly in the first week.”

Mr. Selway said that while rival equity dark pools haven't so far announced any changes in reaction to Luminex's entry, ITG and other dark pools are looking at making some enhancements to encourage block trading on their venues.

“I know for us there's been a lot of investment to improve liquidity, and probably others in the industry are doing the same.” Mr. Selway said. “For us, our response has been to expand globally, like to India, Thailand, Brazil. But I think you'll see enhancements by us and by other dark pools in the first quarter to address block-trading concerns.” He wouldn't elaborate on what those enhancements might be.

Kevin Cronin, managing director, global head of trading, at Luminex founding investor Invesco LLC, Atlanta, said Luminex provided what it was intended to do. “I think the early signs have been very encouraging from the standpoint of liquidity, trades that don't have the same amount of noise as in other venues, its ease of use and transparency.”

Added Andrew Brooks, vice president and head of U.S. equity trading at another Luminex founder, T. Rowe Price Associates Inc., Baltimore: “Almost everyone has had to adjust their workflow and execution systems to make Luminex easy to use. That connectivity is still in progress.”

Along with Invesco and T. Rowe Price, founding members of Luminex include Fidelity Investments, Bank of New York Mellon Corp., BlackRock Inc., Capital Group Cos. Inc., J.P. Morgan Asset Management, MFS Investment Management and State Street Global Advisors.

Mr. Clark said that of the nearly 100 clients using Luminex, about 85% are fully integrated and ready to trade. “We are working with the remainder, and with new subscribers and their tech teams to get them ready to trade as quickly as possible.”

Luminex is also going beyond money managers, extending to large pension funds that operate their own equity trading desks, Mr. Clark said, adding that many of them have indicated they're “absolutely interested” in what Luminex does. He would not identify pension funds that have been in contact with Luminex, but “we will be dealing with them in the near future.”

Mr. Brooks called pension funds “a natural extension” to Luminex's client base. “We do need a wide variety of people to participate. We don't want everyone to be on one side of the boat,” he said.

“We want to make Luminex available to those traders who can benefit through us,” Mr. Clark said, with easier block trading with less information leakage and lower trading costs. He and other industry sources said Luminex charges 0.25 cents a trade vs. 1.5 cents to 2 cents at other dark pools. “But prospective clients must have the size to trade in blocks,” Mr. Clark said, and clients must have minimum equity assets under management of $1 billion.

David Weisberger, managing director at Markit Group Ltd., New York, responsible for trading analytics, sees Luminex having success “in that small, niche part of the market where institutional traders are on opposite sides of the market at the same time. It's the same niche that Liquidnet and BIDS Trading are in, so if you look at the volume they have, you'll get a rough estimate of what Luminex could get.”

According to FINRA data, BIDS Trading LP executed about 209,000 trades on 146.37 million shares for the week of Nov. 2, while Liquidnet Holdings Inc. executed 972 trades on 44.05 million shares.

While Mr. Weisberger thinks Luminex might take market share from the two established dark pools, he said it likely won't hurt BIDS Trading or Liquidnet in general “since they each have unique features, and the interest created by Luminex could increase the overall volume in that niche. As a guess, I think that a small single-digit percent of overall market volume is where (Luminex) will top out. Its success will depend on to what degree buy-side firms find natural liquidity in it.”

Some sources questioned whether Luminex is starting at a time when institutional investors have already adapted to the fragmented nature of market structure. One source at a dark pool who asked not to be identified said, “In terms of block trades ... there are already venues meeting the demands and needs of investors, so why create a new one? They've already adapted to trading on several venues. There are so many functioning platforms operating today, I don't know why other managers would do” what Luminex participants are doing.

But Mr. Selway said that issues surrounding block trading aren't new.

“I don't think the block marketplace is static. People have been working on how to get blocks to the marketplace for years. It's a continual effort. It's possible that Luminex with their manager sponsors has brought new blocks to the marketplace. It's got a certain marketplace to focus on. As for the future, it's still an open question as to whether there will be some rearranging or some new flow to venues.”

Invesco's Mr. Cronin said Luminex is an important entrant into the dark pool fray because “other block crossing networks have kind of failed the mission. There have been issues with proprietary trading, disclosure issues, transparency.” Also, in Luminex, “if you see the sellers of stock XYZ, you're committed to do something,” Mr. Cronin said. “In other venues, some participants can try to get an information advantage by putting selling information out there and then removing it without making a trade. There's no information advantage; large buyers don't give up information in Luminex. You only can see if you're guaranteed to make a trade. Everyone has skin in the game.”

Luminex's Mr. Clark did concede that moving institutional traders familiar with a fragmented market to the new venue “can take some time. There's a lot of muscle memory involved if you've done block trades by breaking them up for so long. But our clients have been able to adjust, and we think others will, too.” n