By Kirsten Grind
Big money managers led by Fidelity Investments are close to
launching a private trading venue designed to let them buy and sell
large blocks of stock without the involvement of Wall Street firms
and high-speed traders, according to people familiar with the
matter.
Nine firms including BlackRock Inc., Bank of New York Mellon
Corp., J.P. Morgan Chase & Co. and T. Rowe Price Group Inc.,
are forming a company that will operate a "dark pool"--a private
trading venue in which activity takes place outside of the public
view--the people said.
The effort is unusual for the fund companies because they are
rivals, and typically use similar trading venues at big banks, or
public exchanges. They have banded together recently out of a
shared desire to reform trading by cutting costs and weeding out
high-frequency traders, who often have an unfair advantage,
according to critics. The companies also have had trouble buying
and selling large orders of stock in other pools, these people
said. The new venue will require all trades have a minimum share
amount.
The Wall Street Journal last spring reported that the effort by
Boston-based Fidelity was under way, but it was in the initial
development stages and other companies hadn't yet signed on. The
project had tentatively been called "Sakura," the Japanese word for
cherry blossom.
Now the partnership between the companies has formalized, with
Fidelity taking the largest ownership position in the new company
and other fund firms holding smaller stakes, these people said. The
company is expected to launch in the coming days, and trading will
begin later this year. The companies will each have representatives
on the board and will work together on decision-making, these
people said.
The company that will host the trading venue is now called
Luminex Trading & Analytics, which was approved as a
broker-dealer by the Financial Industry Regulatory Authority on
Dec. 26, according to public documents. Michael Cashel, a senior
vice president at Fidelity, will be Luminex's interim chief
executive, these people said.
The launch of the company faces some hurdles.
The fund firms will be in direct competition with large banks
that use their own dark pools and trading algorithms as ways to
persuade firms to use them as brokers. UBS AG, Credit Suisse Group
AG and Deutsche Bank AG run the largest dark pools in the U.S.,
according to data from Finra. Other independent operators such as
BIDS Holding L.P. and Liquidnet Holdings Inc. also help facilitate
trades between institutional buyers and sellers. About 14.4% of all
stock trading took place in dark pools in the first quarter of
2014, according to Tabb Group.
Representatives for UBS, Deutsche Bank and Credit Suisse
declined to comment. Spokesmen for BIDS Holding and Liquidnet
couldn't be reached for comment.
Nasdaq OMX Group Inc. recently has approached several of the
banks to take over operation of their dark pools, and also plans to
ask the Securities and Exchange Commission for permission to do so,
The Wall Street Journal reported earlier this month.
Fund firms are betting on the new venue to be different,
particularly because of the widespread commitment from many large
asset managers.
The firms involved together manage many trillions of dollars
through mutual funds, 401(k) plans and separate accounts for
institutional investors, so the new venue has a higher chance of
matching orders quickly and easily, these people said.
Also, the new venue would operate almost at cost, allowing fund
firms to save on fees at big banks. Fund firms that wish to join
the venue would go through a rigorous process for approval, weeding
out high-frequency traders, these people said.
Not all big fund companies have signed on. Absent from the
endeavor is Vanguard Group, the country's largest mutual-fund firm
with about $3 trillion in assets under management. A Vanguard
spokesman declined to comment. Participants of the new venue also
don't plan to use it exclusively, according to these people.
The debate over the fairness of trading in U.S. equity markets
has been happening for the past several years, in part because of
the release last year of the Michael Lewis book "Flash Boys," which
claimed the market is rigged in favor of high-frequency traders,
banks and exchanges to the detriment of institutional and retail
investors.
At Fidelity, with about $2 trillion of assets under management,
the effort to form a new trading venue was pushed in part by
Chairman Edward C. "Ned" Johnson III, who stepped down as chief
executive of the company last year. His daughter, Abigail "Abby"
Johnson, has taken his place. Fidelity created a new division to
house the project, the Journal has reported.
Dark pools have recently run into trouble. Earlier this month
UBS agreed to pay $14.4 million to settle allegations by the SEC
that it didn't sufficiently disclose to all its clients how the
dark pool worked, creating an uneven playing field. It was the
largest penalty ever levied on an alternative trading system.
A spokesman for UBS said in a statement that "issues that led to
these chargers were remedied in mid-2012."
Barclays PLC, which once ran one of the biggest such venues, saw
its investors and brokers flee last summer after New York Attorney
General Eric Schneiderman filed a civil lawsuit accusing the bank
of allegedly catering to high-frequency traders even as it promised
customers it would protect them.
Barclays has filed a motion to dismiss the complaint. A
spokesman said in a statement that it "is based on clear and
substantial factual and legal errors."
Bradley Hope contributed to this article.
Write to Kirsten Grind at kirsten.grind@wsj.com
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