A new stock-trading venue backed by a who's who of Wall Street is pitching a perfect solution. Now they just need to get everyone on board.
- A quartet of ex-Goldman Sachs trading execs have raised $14 million to build a new trading venue.
- Investors include Goldman, Bank of America, AllianceBernstein and Nasdaq Ventures.
- It allows investors to trade large blocks of shares without moving markets.
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A new trading venue that aims to make it easier for large investors like mutual funds and hedge funds to trade blocks of stock is preparing to go live following a fundraise from some of Wall Street’s biggest names, Insider has learned.
PureStream Trading Technologies, started in 2018, is set to announce later on Wednesday that it’s preparing for a launch sometime in the second quarter of this year. It’s raised $14 million from a who’s who of Wall Street investment banks and buy-side firms including Goldman Sachs, Bank of America, AllianceBernstein, and BMO Capital Markets, which bought algo platform Clearpool last year.
Nasdaq Ventures, the investing arm of the exchange whose tech is used by hundreds of other exchanges and dark pools, also participated in the round.
PureStream was founded by a quartet of former Goldman Sachs trading executives, including Armando Diaz, who serves as its CEO. Diaz, who most recently served as global head of cash trading at Citi, declined to comment on the record for this story.
PureStream has ambitions of becoming the go-to trading venue for investors looking to seamlessly trade large blocks of stock. But there are dozens of trading venues available in the US markets, and success will depend on having enough volume to attract many market participants.
“In practice, you need adoption to glean the benefit,” said John Cosenza, head of Americas equities electronic trading at Goldman Sachs. “In concept it makes total sense, it’s an elegant solution to a market problem.”
PureStream joins a fragmented marketplace
The US stock market is already one of the most fragmented markets in the world. With at least 16 national stock exchanges and more than 40 off-exchange venues like dark pools and other alternative trading systems, or ATSs, there’s no shortage of places to trade.
However, that fragmentation can often lead to issues around finding liquidity, especially when dealing in large order sizes, as is the case for bigger asset managers or hedge funds.
That’s where PureStream comes in, allowing customers to more easily find other large players looking to deal in block trades.
The trading venue matches up big investors looking to deal in the same participation rate, or volume, of a specific stock. PureStream executes trades based on pricing from the consolidated tape, which captures all US equity trading volume.
The result is a trading venue whereby large participants can lock in liquidity for an extended period of time without having to worry about moving the market.
“Institutions have access to dark pools, but what they don’t have access to is the liquidity that’s traded on a bilateral basis and reported to the tape,” said Pankil Patel, head of Americas electronic trading at Bank of America. “This mechanism is allowing you to track that volume.”
Large institutions have struggled to find liquidity
PureStream is taking a new approach to tackle one of the thorniest issues in modern equity markets: fragmentation. The SEC adopted regulations 2005 aimed at transforming the competitive landscape for trading venues. Since then, institutional investors who have big chunks of stock have turned to chopping them up into tiny orders and parceling them out so that they don’t move the market.
This means it can take days or even weeks for large investors to exit or build positions that can sometimes number in the millions of shares. Investors don’t want to tip their hand that they have stock to sell or buy because other market players will use that information to their advantage and push the price in the other direction.
One rule of thumb says an order shouldn’t account for more than 2-5% of the market if the people behind it don’t want to cause the market price to move higher or lower. That means it could take days or weeks for someone like AllianceBernstein to unload or build a 500,000-share position.
PureStream’s technology means that investors who may have only felt comfortable trading 2% of the market volume might be willing to trade multiples of that. They match based on participation rate, lock up, and stay connected until one of their orders is exhausted or they decide to break the lockup. PureStream has order types for 15%, 30%, 200% and a custom percentage of the market volume.
PureStream differs from other solutions that have tended to focus on handling child orders, or those orders that are carved off of a larger block. By some estimates, it’s the first to offer a volume participation crossing type, which targets orders upstream at the parent level.
The venue would join a list of other block-trading tools already used by investors such as algorithms offered by large brokerages, so-called blotter scraping algorithms, and the type of block trades where banks purchase the entire block and warehouse it on their balance sheet as they sell it off in chunks.
One of PureStream’s innovations is that it doesn’t target measures of best execution as reflected in a bid-offer quote, but instead uses the historical prices of just completed trades reflected on the consolidated tape. That means the trades inside PureStream don’t move the market.
“This matching paradigm allows you to trade along with the market without actually trading in the market,” Patel said. “It’s an interesting twist, the reference here is the actual trades as opposed to just the quote.”
PureStream’s founders have a wealth of industry experience
PureStream was started by Diaz, a former Goldman partner who has also held senior positions at hedge fund Millennium Management and Citigroup, and fellow Goldman alums Sean Hoover, once co-head of Goldman’s equities execution business, and Yogesh Wagle, a former Goldman VP who was chief information officer for Citigroup’s equities business and a senior exec in Deutsche Bank’s stock-trading business.
A fourth partner, Joe Dellarosa, doesn’t serve in an operating role.
PureStream is structured as an ATS and is currently awaiting regulatory approval from the SEC. The technology is now open to investment banks who want to connect their systems and begin testing.
There’s no assurance that PureStream will succeed. As one of more than 50 venues, its success will depend on attracting attention and volume. Some, like Liquidnet, already cater specifically to large asset managers looking to make sizable trades. Liquidnet has participation from 900 member firms with average daily liquidity of $79 billion in over 8,100 stocks.
In October, TP ICAP, a UK-based interdealer broker, announced plans to acquire Liquidnet in a deal that could be valued at up to $700 million.
PureStream’s launch also comes in the middle of a national discussion about retail order flow and trading activity that takes place away from exchanges.
Around half of all stock trades take place in one of 40-plus dark pools or venues that aren’t registered as exchanges, and therefore offer less transparency. That means the volumes there are dark, or unavailable to investors.
Most retail trading, for example, flows to market makers who internalize the trades instead of offering them to other traders. Those trades only become visible when they hit the consolidated tape.
As zero-commission trading pulls more retail investors into the market, it means more of the total stock market volume is unavailable to big institutional investors. It’s likely, considering Nasdaq’s support, that PureStream will consolidate more volume from other off-exchange venues more than it will pull more trading off of traditional exchanges.
Its value proposition to big investors could lead them to demand their sell-side banks check out and begin to offer access to the product.
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