Credit Suisse last week registered its internal order crossing engine, CrossFinder, as an alternative trading system in a bid to launch a public block crossing network. The launch would allow the firm to significantly boost liquidity. Revenues could also surge as the firm starts collecting execution fees from a larger trading audience, analysts and traders said. “Our goals are to improve liquidity within the firm and provide best execution, reduced information leakage and higher fill rates to our clients,” said Jose Marques, director in the Alternative Execution Products group at Credit Suisse. He added that the network was still in early stages of development, and declined to comment on a timeline.
“We believe this is the way the market is going,” said Guy Cirillo, global channel manager for Advanced Execution Services at Credit Suisse, while speaking at a recent Financial Markets World conference. By opening the system to the public, the firm can now send its proprietary order flow to the network, and thereby avoid paying transaction fees to exchanges. Though the crossing network is internal, Credit Suisse keeps its proprietary order flow out of the system because both clients and regulators sometimes frown on retail order flow coming in contact with proprietary systems.
CrossFinder currently executes about 30 million shares daily, in line with volume executed by independent crossing network such as Pipeline or Liquidnet. That volume is driven by the firm’s current clients. Opening up the block crossing system to the public could easily double the volume, and would bring in more clients, said Josh Galper, managing principal of consultancy Vodia Group. “The market is resolving the issue of liquidity hidden by internalization.”
More brokerage firms are expected to either buy or set up their own networks in anticipation that the Nasdaq Stock Market and the New York Stock Exchange will raise execution fees. “There is a lot of interest on behalf of institutions, and real revenue potential in setting up alternatives to NYSE and Nasdaq. The large brokerages are looking into this,” said Harrell Smith, analyst at Celent. Over the last month Citigroup bought OnTrade ECN, and Merrill Lynch bought Wave Securities, an electronic brokerage subsidiary of Archipelago Holdings. The brokerages can begin driving much of their own order flow through these networks, and finding matches for orders faster with minimal market impact. Smith expects several more networks to pop up this year.
Fees for block crossing would likely be around 2 cents a share. Analysts expect the system to be up in the next two quarters because the technology infrastructure is already in place, and won’t need major technological upgrades.