By Murrough O’Brien, APAC Head of Sales, BIDS Trading
Cboe are excited to launch Cboe BIDS Australia in the local market on 27th February 2023. While it is new to Australian and Asian markets, the BIDS trading dark pool has been around for over 15 years and during that time has become the largest block trading venue in the US, Europe and the UK. Cboe BIDS Canada was recently launched and it is quickly approaching the number one spot in that market too.
BIDS Trading was formed in April 2007 in the US by a consortium of the largest global brokers that were seeking to solve problems that appeared intractable at the time. In a world where liquidity was fragmented across many venues, how could a fund manager efficiently and anonymously execute liquidity in size without disintermediating their trusted brokers for their services (research, deal flow, panel votes, etc.)? How could they do this without leaking information about their trading intentions, which may negatively impact execution performance? Finally, how could orders be executed in size, thereby reducing market impact, without missing execution opportunities in other venues? BIDS was the answer to all of these problems.
BIDS introduced automated conditionals to the US marketplace, transforming electronic block trading. While conditional messages are a new concept to the market here, they have allowed otherwise latent liquidity, both buy-side blotter orders and broker algo flow, to find each other, resulting in block and larger size trades with no execution opportunity cost. By using minimum size settings and several systematic anti-gaming mechanisms BIDS conditionals have provided size discovery while reducing information leakage.
Part of the key to BIDS’ success is that it is not a broker and does not compete with market participants. In Australia, Cboe Australia has partnered with BIDS to offer Cboe BIDS Australia under its market licence.
A dealer must select at least one broker, called a Sponsoring Participant, to sponsor their participation on the BIDS platform, thus strengthening existing broker/client relationships. BIDS’ expansive network, of almost 500 asset managers globally, can make more effective use of their commission dollars and BIDS’ 100+ broker partners can expand their revenue and client coverage, unlike other block crossing networks, that disintermediate the sell-side. This open access model encourages participation from both fund managers and brokers, which captures a diversity of customers and increases matching opportunities for all participants. Wherever BIDS has established itself, it has grown the block market itself, not merely captured market share.
Fund manager dealers access the pool through a front end GUI, called BIDS Trader, that integrates directly with their trading system. BIDS Trader presents them with a blotter of their open orders for submission into the pool. It is completely at the trader’s discretion to submit these as conditional messages into BIDS and they can apply a minimum executable quantity as an anti-gaming measure. BIDS Trader constantly interfaces with the trading system to ensure it has the correct open order size. Therefore, there is no risk of over-execution.
When a match occurs, BIDS will send the dealer an invitation to trade, which includes basic information on how they wish to execute. No volume or price information is disclosed to the contra party. A Sponsoring Participant must be selected from a dropdown of participants to represent and be responsible for the order. If the match is successful, the Sponsoring Participant’s middle office receives and is responsible for the trade under the fund manager’s account. They will clear and settle as per any of their other trades, and receive the associated commission. The trade is an on-market trade on Cboe Australia under the chosen Sponsoring Participant’s participant ID, who receives market share for the trade.
As mentioned above, access to the pool is not limited to fund managers. Sponsoring Participants can submit conditional messages or firm (committed) orders into the pool. Conditional messages allow a parent order to be represented in BIDS without limiting a broker’s ability to execute as they normally would on other venues. This means that orders have the potential to execute in size but with no execution opportunity cost.
BIDS recognises that order information is extremely sensitive and any leakage of this data can have a negative impact on performance. Cboe BIDS Australia will include anti-gaming mechanisms to monitor and enforce appropriate conduct by users. The final mechanism has not been settled for Cboe BIDS Australia, but we will notify the market once it has.
BIDS efficiently and safely knits diverse forms of liquidity together and we expect it to have a strong positive effect across the Australian equities market, similar to the other new markets it has entered. If you’d like more information on Cboe BIDS Australia please contact firstname.lastname@example.org.
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