A startup trading venue — Stamford, Connecticut–based AX Trading — is trying to revive the block trade, targeting institutional traders on the hunt for block liquidity in small- and mid-cap stocks.
Its challenge is to win market share despite the prevailing trend — markets awash in high frequency trading and a growing army of young traders accustomed to working with speedy algorithms and small trade sizes. AX Trading says the answer is a return to a trading model from the past — the call auction — transposed to an online, alternative trading system format.
At least one major exchange thinks it can work. This week it was reported that Nasdaq OMX had preliminary discussions with AX Trading about a potential joint venture or acquisition, to help the exchange operator diversify its offerings. Neither party would comment on the negotiations.
AX Trading was founded in November 2011 by Kevin Callahan, a former McKinsey & Co. consultant and managing director at Jones Trading; Peter Jenkins, a former head of the New York Stock Exchange’s institutional client relations group; Mohan Thurairajah, former global head of connectivity at TradingScreen and a member of the early development team at the Intercontinental Exchange (ICE); and James Ross, a veteran of electronic and alternative trading systems at Instinet and the NYSE.
After reading a book on the history of the call auction market and its coffee house origins, Callahan realized that the call auction — a market where all buy and sell orders are matched together at an appointed time and at a single clearing price, the way traders operated 200 years ago — was the underlying structure of the phone-based, block trading business. This is a contrast to the continuous, high speed markets one associates with traditional exchanges and different from dark pools that do not run auctions but rather simply aim to find matches at the midpoint. ....