Online trading service aims at ‘upstairs market’

Toronto startup Markets Inc. hopes its forthcoming online stock trading system will help large investors solve a long-standing problem: how to line up large stock transactions without alerting the market to their intentions and thereby affecting

prices before the deal is done.

Called BlockBook, the system is aimed at pension funds, mutual funds and large institutional investors. Judith Robertson, Markets’ chief executive, said there are about 50 potential customers in Canada, and more around the world.

BlockBook will allow large investors to tell the system what they would like to do – for instance, sell 25,000 shares of Nortel Networks Inc. at $4.00 or more – and the system will do the rest. If a buyer is available at the right price, the system will match up the buyer and seller and the deal will be done. Nobody will know either the buyer or the seller’s intentions until the deal is done, and even the parties themselves will never know each other’s identity.

Today, a large investor that wants to buy or sell stock calls a trusted trader at a big brokerage house, who looks for a matching buy or sell order in what is known as the upstairs market – not on the stock exchange itself, but within the brokerage house. This is supposed to keep the investor’s intentions quiet, but to line up deals, traders must talk to each other, and as they do that, word of the investor’s intentions gets around. Given the size of these investors, that can affect the stock price to the investor’s disadvantage.

Though it is not yet performing live trades, BlockBook is complete and being tested, but the greatest challenge may still lie ahead. Markets must convince enough big investors to use the system that it gains critical mass.

“The challenge they could run into is likely behavioural,” said Jim Carroll, a Toronto-based Internet consultant and author of several books on e-business. “Everybody talks a good game, that they want to co-operate with their competitors, but when push comes to shove, they consider their own interests.”

Markets Inc. saw the need to build relationships with its potential customers from the beginning, though. Robertson said the company has been working for over a year with a core launch group of 30 institutional traders and five stock dealers, and hopes to have about half those institutions and three to four dealers participating in live trading from the outset. 

“You need to have a critical mass,” she said. “We identified that as a key issue right off the bat, and so one of our primary strategies was to engage the core group right at the initial stage.”

The technology of a trading system like this is complex but required no major breakthroughs, said Karl Abbott, chief technology officer at Markets. Electronic trading systems are “not hideously complex, but there’s a lot of pieces to them and they have to work 100 per cent of the time.”

Abbott said the system’s availability and provability requirements and the wide span of functions it has to provide to traders, regulators, data vendors and others added to the challenge.

BlockBook runs on Windows 2003 servers, hosted by Q9 Networks Inc., a Toronto-based managed services company. The auction and exchange software that runs on these servers was custom-developed by Markets and a development partner which Abbott would not name. “There’s a bit of everything in there,” he said, “but primarily C++.”

Markets is supplying client software that its customers can use, developed for Windows PCs using Microsoft’s .Net framework, but will also interface with any client software that complies with the Financial Information eXchange (FIX) protocol.

The user interface is simple. Users enter the names of stocks in which they are interested. Activity in a stock is shown using colour codes. A stock with no orders outstanding against it appears in white. When there are both buy and sell orders, the symbol appears in green. Once a trade is completed it shows in orange. There are several other colours with other meanings, Abbott said.

To use the system, investors will need to set up accounts with Markets Inc.’s broker-dealer subsidiary Market Securities Inc. The system is not for small traders – a 25,000-share minimum applies. The company will make its money on commissions on the trades.

Markets Inc. still needs to complete some legal paperwork and cement commitments from investors and dealers before going live.

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Grant Buckler
Grant Buckler
Freelance journalist specializing in information technology, telecommunications, energy & clean tech. Theatre-lover & trainee hobby farmer.

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