The global bank Citigroup (C), the third largest bank in the U.S. by assets, launched a new dark pool for trading earlier this week.
Citi announced the introduction of its new Alternative Trading System (ATS), Citi Cross – the company’s attempt to create a fast trading platform to help out the large firms compete with today’s high speed traders.
This is all part of the plan laid in 2010 by the now co-head of the electronic trading division, Dan Keegan, to have Citi rank among the top five trading firms, and this move was specifically made to compete in the bold new world of high frequency trading. It definitely has the size to compete by offering better quality service to its clients, and with this product Citi aims to attract additional actively trading financial institutions.
(Forgot what high frequency trading is? Check out our HFT 101 article.)
What Is Citi Cross?
Citi Cross is a real time trading platform that the company hopes institutional investors and retail firms who are looking for increased speed and liquidity will take advantage of. The ‘ alternative trading system’ that Citi has rolled out utilizes a distinctive even allocation-matching algorithm that offers more financial flexibility and liquidity to investors. Citi’s press release notes:
“The new alternative trading system is the first dark pool to leverage an even allocation matching algorithm to fill orders on a per-participant basis, thus abandoning the price-time priority and pro-rata conventions.”
So what does the Citi Cross algorithm actually do? Let’s break this down.
Why Is Citi Cross Needed and How Does It Work?
The problem: In today’s typical stock markets, trading happens first-come, first-served based on whose bid is at the top of the Order Book (the BBO, or ‘best bid and offer’). But because of all the high speed trading mechanisms out there these days, it is very difficult to actually place an order fast enough to ever be ‘first in line’ to buy a stock, which decreases liquidity and speed at any given price-point.
The solution: So when Citi Cross says they are removing the price-time priority, they mean that their engine is effectively removing the first-come, first-served rule so that all willing buyers or sellers at a given price point get to evenly split the available shares.
A dark pool is a place where trading is done off the exchange in a highly liquid, real time environment before prices hit the market – Citi Cross is one of these places. Trades are executed partway between the ask price and the bid price, saving time and ensuring speed and liquidity.
Everyday Investors: Is Citi Cross For You?
Not really. Citi Cross is working to level the playing field for big players in the investment field. In theory the ATS will not prefer market participants that have the fastest technology (HFT) since it has eliminated the concept of queue position, aka first-come, first-served. Orders will be filled on a per-participant system without taking into account the size of an order or the time it was placed. These price improvement(s) will be passed on to investors.
Both buying and selling clients stand to benefit from this new ATS as they will have retail and institutional order flow available to them prior to it going to the open market. The bank has also asserted that the ATS will offer a lot of liquidity to retail and institutional flows.
Where High-Frequency Traders (HFTs) and Citi Cross Meet
The Citi Cross system has been specifically designed to link up HFTs with institutional investors.
This is in stark contrast to the prior perception that HFTs were despicable predators whose quests to gain profits in microseconds were viewed as unethical and perhaps even illegal. Citi’s other ATS, Citi March, cannot compete with the Citi Cross to attract HFTs because it does not permit these HFTs to interact with the retail flow of the firm. Furthermore, Citi March has a transaction cost of a penny per share. Nonetheless, Citi will have to properly govern high frequency trading for it to add value.
Citi Plays the Size Card Well
It is expected that institutional investors will make maximum use of the resources offered by the Citi Cross. Citi can now strongly assure its institutional customers of getting a match within Citi itself owing to the brokerage service controlling a ton of volume through Citi Cross and the older Citi March.
There are skeptics of a growth strategy dependent on matching institutional orders with retail flow, but Citi’s size will be a big factor in the servicing of clients which will ultimately determine how successful Citi Cross will turn out to be.
For now, Citi has taken a step in the right direction toward ensuring its future competitiveness.