The New York Stock Exchange and the Nasdaq Stock Market had barely announced their late-April takeovers of rival markets when traders started to worry about competition drying up. Recent events suggest those concerns may be overblown.
First, in mid-June, Citadel Investment Group and Merrill Lynch each bought 10 percent of the tiny Philadelphia Stock Exchange, in part to create a buffer against the NYSE-Nasdaq duopoly in stock trading. New regulations requiring traders to hit the best available prices, regardless of which market offers them, could help long-irrelevant regional markets like the PHLX attract more orders.
Now there's another entrant in the fast-growing electronic block-trading business, where a handful of upstart systems have been taking market share from the major exchanges. Nyfix, a Stamford, Connecticutbased provider of order management systems for brokerage firms and institutional investors, is introducing Nyfix Natural, an electronic system that will allow institutional investors to anonymously trade large blocks of shares away from the Big Board and Nasdaq.
"We're trying to provide another alternative to the two big markets that are left standing after all the consolidation in the past few years," says Bob Gasser, 40, head of Nyfix's transaction businesses and a former equity trading chief at J.P. Morgan Securities. "I think the competition is just getting started."
Nyfix Natural, which about 50 institutional investors began using on June 22, will vie for orders with established block-trading networks like Liquidnet and Pipeline Trading, as well as with the major exchanges. The NYSE and Nasdaq are acquiring Archipelago and Instinet's Inet trading systems, respectively. Both Archipelago and Instinet had swallowed smaller competitors before being bought themselves. Nyfix's existing execution platform, called Millennium, currently offers execution in only NYSE- and American Stock Exchangelisted securities but will expand to Nasdaq-listed stocks by September.
Nyfix Natural is an offshoot of Millennium. Users of Nyfix's order management and routing network allow their orders to pass through Millennium on their way to the NYSE for execution. The system holds these orders for a fraction of a second, searches for better-priced matches among other Nyfix users and, if they're found, executes the trades. Nyfix Natural makes this passive liquidity pool more active for users by enabling them to send indications of interest in particular stocks into the system. Traders can query for blocks of between 5,000 and 25,000 shares, depending on the market capitalization of the stock in question.
"We've got buy-in from a good percentage of the assets under management in the U.S.," says Gasser, noting that his firm's clients helped design the new system. "So we're optimistic that we're on the right track."
