Instinet launches dark pool for options

Instinet, the electronic trading platform announced on Tuesday that it is launching a non-public or 'dark' venue for executing small and large positions in US equity-listed options.

The platform will be called Instinet Options CBX and will provide more competition in the burgeoning so-called dark liquidity Space, where trades are negotiated away from public exchanges.

While dark pools flourish for equities in conjunction with NYSE Euronext, Nasdaq, Bats Exchange and Direct Edge, the four main public exchanges, the structure of situation for equity options is different.

All orders that are privately matched for options must ultimately be shown across option exchanges and printed onto a consolidated tape for all investors to see, which means dark pools for equity options cannot truly exist.

But, the industry is attempting to bring some of the elements of non-public trading into the sector, as privately matching buyers and sellers can facilitate large blocks being traded and lower costs of execution.

The CBX is fully automated and electronically matches buyers and sellers of options, and then routs that trade to an exchange in order for it to print at the agreed price. This means that in some cases, the agreed trade on CBX, could be "stepped on' by another investor who wishes to trade at the same price.

Instinet says its routing of trades is designed to send them to exchange venues where there is a lower likelihood of the matched trade being 'stepped on', but they concede that in some cases there is a 60 per cent chance that a trade on CBX is altered before it actually trades.

Instinet says its platform has launched with an established base of liquidity, and, unlike other options dark pools, is targeted to clients trading all order sizes rather than those just looking to trade large blocks. That should appeal to high frequency traders, who prefer small trading sizes, as well as institutional investors who look at bigger trade sizes.

John Duffell, chief strategy officer at Instinet said in the press release: "Our clients tell us that they would find value in an agency-operated options liquidity pool that provides price improvement opportunities for orders of all sizes."

The new platform will position Instinet against other equity dark pools operated by Pipeline and Ballista Securities, who focus on block or large orders.

"We are poised to apply our experience and insights in cash equity markets to US listed options markets as they continue evolving," said Jonathan Kellner, president of the Americas at Instinet.

"While there are key market microstructure differences between equities and options, the main contributor to providing best execution to our clients in any asset class lies in the seamless and stable interaction between the EMS, algorithms, smart routing, and crossing networks," he added.

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