Ray,

Thanks for the links. Congrats on the launch of NYBX. I believe the NYSE is moving in the right direction. That said, your business model is getting very complex. Great care needs to be taken to manage it well.

What steps are being taken to reduce the risks of such a complex business model?

How is the floor fitting in to all of this? I can not even imagine what the floor environment is like anymore.

by Scott M. on January 30, 2009 1:49 PM

Scott -- Good questions.

I see our recent initiatives as natural extensions of our core functions of providing trading, listing and technology services. We're looking to provide customers with new opportunities and capabilities in these areas, and help them solve problems.

NYBX is designed to leverage the latent liquidity in our market and give those orders a greater opportunity to meet the other side, in large size. It also is intended to re-aggregates fragmented liquidity, which has made it difficult for customers to complete large trades.

The NYSE Trading Floor today is doing better, in terms of market share, than it has in a long time. The floor can use NYBX as another way of helping their customers get a block trade done, which also means greater incentive for customers to place their orders on NYSE.

Thanks for writing, Scott.

by Ray Pellecchia on February 2, 2009 5:46 AM

Ray,

I get in a argument with an office mate of mine almost every week. Maye you can give me a definite answer so we can stop arguing. He believes REG NMS was never implemented because trade throughs still happen. I believe that reg nms is in effect and the trade throughs are just exceptions to the rule. What is the answer.
Thanks,

by josh on February 3, 2009 9:21 AM

You win, Josh. Regulation National Market System is the law (or regulation) of the land.

by Ray Pellecchia on February 3, 2009 2:45 PM

thanks ray

by josh on February 3, 2009 3:02 PM

As a former prop firm trader I worked a lot with dark books. The second point brought up in the original post is interesting, as I think there are two sides to it.

When using dark books within a small cap stock as an active trader (one who had access to the dark books) liquidity is actually increased. A dark book, or the trader behind it does not want the market to know they are there, otherwise they would have taken all the supply the stock already. Thus, the dark book sits waiting for additional liquidity sources to find it. Nerveless that liquidity is there, whether seen or not.

Small investors may not know this is occurring. But the very fact there is a dark book actually increases volume once transactions start firing on that dark order.

When I traded I always tried to exit on dark pools first. This means if I had 5000 shares I would get as much out on dark liquidity as I could. This means those shares are not taken off the visible book, which means someone else can now buy or sell them.

From personal experience, I rarely used dark books to place orders, but I did use them to exit positions. This basically meant that some my orders showed on the NYSE or Nasdaq Level II, while some were not shown on the book but were reflected in the ticker as transactions through against the dark book.

I don't think the small investor is hurt by this. Anytime we have someone who wants to pick up or dispose of stock, whether hidden or visible, inevitably that has to create movement or volume. That movement or volume can benefit the small investor because they can capture these movements with small share amounts. They are not playing the same game as the dark pools.

If a hedge fund needs to pick up 30,000 shares of a stock that does 10,000 volume on average a day, they are not going to do it 100 shares at a time over 3 months. They are going to leave a dark order out and hope someone comes along with bigger lots than the measly shares which are showing on the book. Thus big traders exit on each others dark orders, and small investors still have the shares on the book to enter and exit positions. If a trader is big enough to have to worry liquidating large positions that could cause massive slippage, then they should have access to dark books.

But in this new age of lots of hidden liquidity, traders, especially short term traders need to be aware of what side the big money is on, and when.

Just as a large order can cause surges or dumps in price, so can a discovered algorithm which then is exploited by traders. Traders need to aware of this.

You can find more of my writings on http://www.darkpooltraders.com if you are interested in talking and discussing optimal trading strategies

by Mike on May 11, 2009 4:19 PM