In a sign that dark pools of liquidity are continuing to proliferate, on Tuesday BNY ConvergEx Group LLC launched ConvergEx Cross, a new block crossing service that matches orders and is open to buy- and sell-side firms.

The proprietary crossing network combines the natural liquidity of the BNY agency brokerage business with the technology of Eze Castle, the buy-side order management system it merged with in October of 2006. It took only four months for ConvergEx to put together the crossing network, which has been registered as an alternative trading system (ATS) and went into production beta testing on Feb. 6 before going live on March 6.

“When we had the opportunity with the merger with Eze Castle to do a crossing network that incorporated the best ideas that floated around, that was a natural,” says Gary Ardell, managing director and head of BNY ConvergEx Group’s Financial Engineering and Advanced Trading Solution.

According to Ardell, the most important flow initially coming into the system from outside of ConvergEx is from the Eze Castle customers. BNY expects to get most of the customers on the cross by the end of the year, he says. (Plans are to integrate with other OMS vendors and connectivity platforms in the second half of 2007.) With the buy-side’s permission, ConvergEx will read their order books and make their orders available for crossing.

“ConvergEx has a natural pool of liquidity. If they are going to use Eze Castle — they have a lot of hedge funds and a lot of buy-side firms that use them — they could offer directly to them a means of going into some type of negotiated pool,” says Brad Bailey, senior analyst at Aite Group.

The fact that ConvergEx is “scraping the blotter is interesting,” says Bailey, noting that this helped Liquidnet, the largest block trading network, get started. Last November, Liquidnet filed a patent infringement lawsuit against rival Investment Technology Group (ITG), claiming that its Channel ITG product violated the patent related to indications-of-interest systems. But ConvergEx has created its own patent pending method, says Ardell. “We have created an altogether different system that allows us to get information from the OMS into the crossing network,” says Ardell.

On the other hand, every broker appears to be launching an ATS. “Everyone keeps calling for the top in the growth of dark pools and crossing networks,” says Bailey. “We’re up to somewhere around 40 of these (ATSs),” says Bailey. The question is will ConvergEx bring something different to the table?

Before starting its ATS, ConvergEx spoke with buy-side customers who told the firm to include both negotiated crosses and automated crosses. While there are two schools of thought in the crossing world — Liquidnet offers negotiation while POSIT and Pipeline provides automatic crossing — “ConvergEx is the first that is allowing both negotiated and automated crossing,” says Ardell. “Customers can say they want a particular order to be negotiated or automated or it can be either one — find me the liquidity.”

The buy-side also told ConvergEx it had to do something about gaming to prevent traders from fishing for information in the system. Therefore, ConvergEx has a rule that says the first 10,000 shares of a negotiated cross must be done immediately at the midpoint price. “That gets rid of window shopping,” says Ardell. While the negotiated side is completely tailored to block size, and he expects clients to use negotiation for trades that are 25,000 shares or more, the automated side can be run at any size. “We’ll wait and see what the automated side of the cross does. The system is so flexible that it can be used in many different ways,” he says.

While Pipeline decided this week to shut access to broker algorithms, ConvergEx is an open system and will allow algorithmic engines to participate with resident orders, but “not if they are just fishing for liquidity,” says Ardell. The crossing network won’t support immediate or cancel (IOC) orders. “To participate, they have to post real liquidity in the system,” says Ardell.

Another innovation is that customers can define their own universe of potential crossing partners, says Ardell. “If a given customer doesn’t want to cross against algorithmic flow, they can just tell us so,” he says. Or, if a buy-side customer doesn't want to interact with the sell-side contra-party, he can just tell us to eliminate these potential crosses," adds.

In addition, ConvergEx is packaging up Pershing’s retail flow and making it available to the cross. Owned by The Bank of New York, Pershing is an affiliate of ConvergEx. The retail flow will be bundled up over days and weeks and available as a block to the crossing network. “This is a big difference between us, Liquidnet and Millennium,” says Ardell. Institutions can indicate whether they want to interact or not with the retail order flow, says Ardell.

Still, the strongest asset seems to be Eze Castle since it can tap into the natural interest of buy-side firms that are trading actively. “It gives them a leg up because they’re already in front of all these people,” says Bailey. One of the ongoing challenges the buy-side faces is dealing with so many different venues including regional exchanges and another ATS, says Bailey. “Adding this functionality to an already connected pool of clients could give them an leg up in the trading in the crossing network,” says Bailey.

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