Crossing Networks: Bringing Back Large Block Trades to Institutional Trading

Analyst Author:
Alex Ramistella
Analyst, Securities and Capital Markets, TowerGroup
Feb 2006
Reference # V46:11SM

According to TowerGroup Analyst Alex Ramistella, “The Pipeline system is definitely one of the toughest systems to game and truly a place where participants can find liquidity for the larger-size trades…. Given that it is the only player in the block crossing space that intends to require a large minimum trade size and not allow the system to accept small trade size orders, it should be successful in building a loyal client base that looks to this system first for large block liquidity before trying other venues.”

Pipeline Trading

Pipeline Systems launched its Pipeline Trading ATS in September 2004 with the intent to create a large hidden book of liquidity through Pipeline Block Board. The Pipeline Block Board trading platform is an easy-to-use, interactive, completely anonymous tool for finding liquidity. All orders placed on the Pipeline system are firm orders without indication of size, side, or parties involved.

Pipeline has had great success, achieving a 55% quarter-over-quarter average growth rate since its inception. Its client base has reached 300 members (220 active) in just over a year, which is remarkable considering the company entered the market as a small, independent firm looking to wedge its way into an area that has seen so many failed attempts at entry.

TowerGroup Opinion

Pipeline Trading ATS is starting to make a mark in the world of large block trading with what TowerGroup believes is a unique model that minimizes the risk of gaming and information leakage and is truly focused on the large blocks. The philosophy of this ATS is based on giant minimums, which require users to have only large blocks available for trade. The large minimum order size requirement, along with the fact that all orders are firm, does not lend itself to gaming or "pinging" the system to find out market information. Some large hedge funds or brokers have sufficient capital to place orders in the system simply to discover whether there is a buyer or seller for a particular stock, but since the minimum match is 10,000 shares, that could be a heavy price to pay. The Pipeline system is definitely one of the toughest systems to game and truly a place where participants can find liquidity for the larger-size trades.

TowerGroup expects Pipeline will continue gaining traction in this space if the firm stays focused and committed to its platform and philosophy. Given that it is the only player in the block crossing space that intends to require a large minimum trade size and not allow the system to accept small trade size orders, it should be successful in building a loyal client base that looks to this system first for large block liquidity before trying other venues. This is a strong strategy as long as Pipeline can continue to gain clientele and provide enough liquidity at a level that remains advantageous for the users to tap the source. If its volumes or order flow start to slide due to liquidity issues, Pipeline must react quickly and make the proper adjustments to meet its clients' needs. Pipeline is already connected to various algorithms and allows other electronic trading systems to look for liquidity in the Pipeline system, so transition to a full-service electronic trading platform would be easy.

With regard to the major complaint on the Street that the block crossing systems' execution rates are too low, Pipeline is far ahead of its competitors. With fill rates up at 26%, the highest in the space, Pipeline is proving that its model of commitment to firm orders and giant minimums has merit and will continue to draw attention. The accuracy of the 26% number can be questioned, because many people wait to see activity in a particular stock before entering an order in the Pipeline system and increasing the execution rate. Even if this number doesn't paint the entire picture and is off by as much as 50%, though, Pipeline Trading still has the highest execution rates of the block crossing systems, and the product does seem to do a good job in filling trades entered.

As Pipeline continues to build its client base and pool of order flow, TowerGroup expects its market share to increase, along with volumes and order size, making Pipeline the only true "block" trading system available.

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