Credit Suisse Securities will begin operating a stock market by the end of March, according to Dan Mathisson, head of the firm’s electronic trading unit.
Mathisson told Businessweek earlier this month that the venue, Light Pool, will be the first U.S. electronic communications network to be started in five years. The ECN is aimed at institutional investors such as mutual funds, hedge funds, pensions and endowments. Unlike existing exchanges, Light Pool will employ a system to classify users by how they trade as a way to set prices and keep out unwanted speculators.
The announcement comes in the wake of the so-called “flash crash” that occurred on May 6, 2010. Largely blamed on high-frequency traders, it caused the Dow Jones Industrial Average to plunge almost 900 points, only to recover those losses within minutes.
According to Businessweek, the Credit Suisse Group AG unit is launching the venue as industry executives and some investors criticize the fragmentation of markets among 13 U.S. stock exchanges, three ECNs and more than 40 dark pools, or private platforms run by brokers to trade stocks without displaying bids and offers. An ECN is a computer system for matching buy and sell requests that competes with the New York Stock Exchange and Nasdaq Stock Market.
“There’s a real need for a new kind of displayed market where all the rules are set with long-term investors in mind,” said New York-based Mathisson. High-frequency trading, which encompasses computer-driven strategies whose common thread is the rapid submission and execution of orders, accounts for at least half of U.S. equities volume, according to the U.S. Securities and Exchange Commission. “Our idea is to forego that chunk of the market and create a niche market with rules aimed at long-term investors,” he said.
As the magazine notes, increasing automation and competition have reduced the NYSE and Nasdaq’s share of trading in securities they list from as much as 80% in the last decade. Now, less than 30% of trading takes place on their main exchanges as orders are dispersed to more than 50 competing venues, almost all of them fully electronic. Twenty years ago, fewer than 10 exchanges competed for the bulk of U.S. equity trades.
Firms that fail to meet standards aimed at protecting long- term investors won’t be allowed directly on the Credit Suisse venue, said Mathisson, head of the broker’s 250-person Advanced Execution Services group. Credit Suisse will subsidize the ECN, which isn’t expected to be initially profitable, as a service to its institutional clients, he said.