Squawker prepares algo-free equity market

Gregory: human traders need a way to trade in blocks

Capital markets are broken because liquidity is fragmented and there is no way for the sell-side to pool its liquidity – but that will soon change, according to Christopher Gregory, co-founder and chief executive at start up trading venue Squawker.

Due to launch across Europe next month, Squawker is a sell-side only service that aims to match banks and brokers and allow them to trade large blocks of stock with each other. On the platform, there will be no automated crossing, no algorithmic flows, no high-frequency trading and no market data business. Instead, the company will follow similar principles to an online dating site or a social network: participants will be introduced to each other based on their characteristics, behaviour and interests, but it will then be up to them to negotiate a deal.

“This is about solving a problem for human beings,” Gregory told Banking Technology. “There is a growing divergence between human and machine trading. Order books provide fast, thin liquidity, lots of little orders. But it’s very hard to interact with the market as a human being, because the liquidity is too shallow and is often gone before you can get there.”

Europe’s average equity market trade sizes have consistently fallen in recent years. In January 2012, the average trade size on the London Stock Exchange was £6,081, according to figures provided by Morgan Stanley. A year earlier, the figure was £7,817. Long-term investors often blame HFT for the decline, on the basis that fear of being picked off by predatory HFTs forces participants to avoid market impact by using smaller than average order sizes – a process that produces a gradual downward spiral.

Buy-side venues, such as Liquidnet, have established a strong following by establishing a network based on buy-side only flow, with non-displayed matching to ensure that long-term investors are able to interact with each other. However, according to Gregory there is still a fundamental need to use the sell-side, because Europe’s estimated 3,500 buy-side firms need the span margining and risk management services the sell-side provides, and because it also need a means to ensure its flow is matched against the right counterparty. That is a problem, because the sell-side is bound by a market structure that perpetuates fragmentation.

“If you want to trade a larger block of stock today, the real problem is who to talk to,” said Gregory. “How do you find a counterparty? The sell-side exists to aggregate buy-side flow, but it then becomes siloed because each firm views the others as competitors. What’s missing is an anonymous venue to connect the bigger banks such as Goldman Sachs and Morgan Stanley.”

Gregory’s previous experience in financial markets since the year 2000 includes senior roles at SunGard global execution services, clearing technology provider Penson, a five-year spell at UK technology company Fidessa and most recently a role at the UK capital markets division of IT and consultancy firm Tieto. He began work on Squawker in May 2011.

All the software behind Squawker was written in-house by the firm’s own team, over a period of two years. The servers will be hosted by BT Radianz in its European data centres, allowing users of that service to connect using their existing connectivity. The firm is also expected to announce the identity of its central settlement counterparty imminently.

The factors Squawker will take into account when matching include behaviour, trading size and areas of repeated interest. To protect against users ‘fishing’ or ‘pinging’ for information with no intention of actually accepting a trading match, the venue will allow members to only trade with firms that accept above a certain proportion of their matches. Users will be able to set how they want to trade, for example using a consolidated VWAP trade or consolidated mid-price buy. They will then enter into a private structured conversation through FIX messages. There is no name give-up – participants will remain anonymous.

In addition, Gregory has said that Squawker will not seek to make market data a profit centre. The profits that exchanges are alleged to make from market data have often provoked controversy, with MTF leaders such as BATS Chi-X Europe’s Mark Hemsley accusing the exchanges of obstructing the path towards a pan-European consolidated tape because of their own vested interests. Transactions that happen on Squawker will be published, but each firm will be responsible for doing its own reporting.

“This is unique in the sense that we match counterparties, not orders,” added Gregory. “We’ve made a conscious decision not to make charging for market data a profit centre. This is not just another ‘me too’ platform. We have looked long and hard at other trading venues, learned their lessons and we are solving a real need that nobody else has addressed.”