Instinet, CS to Access Each Other's 'Dark Pools'

NEW YORK—Instinet announced last week that it would partner with Credit Suisse's Advanced Execution Services (AES) unit to provide their clients with access to each other's dark liquidity pools via Credit Suisse's CrossFinder and Instinet's CBX, a move analysts see as the beginning of a trend.

Dark pools of liquidity have created "a pretty large issue for institutional traders in that they can't get to all these places in any kind of efficient manner," says Mike Plunkett, president of Instinet for North America. "In some degree, they're all proprietary pools," Plunkett says. "There's nothing that ties that all to one single point of entry."

The pairing is simple from a technology standpoint, Plunkett says. "It's really just FIX connections between the parties."

However, dark pools of liquidity have "changed the way we need to approach clients from the technology perspective," Plunkett says. "We need to make sure we … get out to as much liquidity as possible and reduce keystrokes at the same time."

When asked why Instinet would be willing to partner with a competitor, Plunkett says "the benefit is for the client. It gives them an official way to access liquidity and it keeps us in the client work flow."

Plunkett says Instinet is currently in talks with several other potential partners and expects to add one more firm before the end of November. "Our stance is that we want to be open and [create] a reciprocal arrangement," he says.

Similarly, "Credit Suisse pursued this bilateral arrangement in order to expand access to dark liquidity and reduce fragmentation in the space," says Jose Marques, a director in equity trading at Credit Suisse. "Our trading objectives are driven by best execution and being able to source low-impact liquidity in an expanded dark pool is a tremendous benefit for our clients," Marques says.

David Cox, an analyst with market researcher IDC/Financial Insights, says the pairing is "plausible, logical and sensible." There has been an increased interest in providing better mechanisms for accessing dark pools of liquidity, Cox says. "The market is quite saturated with various schemes at the moment," he says. So, it makes sense that Instinet and Credit Suisse would "pool their resources" in an effort to find a solution, he says.

There is the "possibility of losing business" when partnering with a competitor in this manner, Cox says, but "since there are so many solutions out there anyway, the partnership is a smart way to respond."

The industry could see similar pairings in the future, Cox says. "There's definitely a trend here—a natural consolidation like you saw with the exchanges."

Advances in technology have made such pairings easier, Cox says. The increased use of algorithmic trading has created a "kind of arms race in algorithmic trading," which results in higher stakes and cost of development and maintenance. As a result, it makes sense for firms to join forces on such efforts, he says.