Several of the world’s largest asset managers are discussing the creation of a joint equity trading venue, in an attempt to end the technological arms race sparked by high-frequency trading firms.
Fidelity, the Boston-based manager with $1.9tn under management, has sounded out rivals about routing their share trades through a central venue that would rival traditional stock exchanges and so-called “dark pools” of liquidity.
BlackRock – which, with $4.3tn in assets, is the biggest manager of financial assets in the world – is among those interested in using the mooted new venue, which has been given the code name Sakura, after the Japanese word for cherry blossom.
Executives at Fidelity have also received expressions of interest from other buyside firms, although discussions remain at a preliminary stage and numerous obstacles remain to overcome, said people with the project.
The fragmentation of equity trading across 13 public stock exchanges and another 50 alternate venues has caused frustration for large buyside firms, even as it has been credited by some with creating competition and lowering costs.
Firms have had to expand technology budgets to cope with the emergence of high-frequency traders, which use algorithms to sniff out when big buyers are in the market and which exploit the complexity of the current system to harvest millions of tiny trading profits.
Fidelity in particular has sharply expanded its technology spending to hide its trading intentions so as to avoid giving signals that HFT firms can exploit.
The debate about whether HFT is good or bad for the markets has come to life again in recent weeks after the publication of the Michael Lewis book Flash Boys: A Wall Street Revolt .
Mary Jo White, chairman of the Securities and Exchange Commission, waded into the debate, saying that the equity market was in need of a “soup-to-nuts review” in an interview published by Bloomberg Businessweek on Thursday.
BlackRock said in a policy paper this week that regulators should do more to fine-tune rules to improve the stability of the market and rein in some of the more predatory high-frequency trading strategies.
BlackRock said: “Exchanges and regulators need to establish a robust framework to police and identify abuses, and to act on manipulative practices when found. Furthermore, regulators need to assess where loopholes may exist and work to close them.”
The development of Sakura, which was first reported by the Wall Street Journal, is aimed at providing buyside firms with a venue whose rules are less complex and where trading activity is more transparent.
Most large asset managers already “internalise” whatever trades they can, so that funds that want to sell a particular stock are matched with funds that want to add that stock to their portfolios. Sakura would be a platform for combining forces, creating a larger pool of liquidity.
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