Pivot Brings Dark Pools to IM

Instant messaging long ago ceased to be just about buddies sending messages back and forth. Increasingly, hard-core traders have been using IM to exchange information and even to make trades via their brokers, using Financial Information eXchange Protocol, known popularly as FIX Protocol.

The protocol essentially is a set of common specifications for messaging language that allows for electronic communication of trade orders. It was only a matter of time before traders sought to use instant messaging for more than just communicating with co-workers and colleagues and broker-dealers incorporated software on their end that allowed them to recognize and act on trade orders sent by traders via instant message using FIX Protocol. And it was only a matter of a little more time before that idea linked up with the new hot trading realms: dark liquidity pools and algorithmic trading.

So-called dark pools are essentially electronic off-exchange equity trading environments, such as within a private bank network. Securities prices aren't quoted publicly, and transactions are often handled anonymously—with the buyer and seller matched and the order filled via electronic crossing networks— hence the mysteriousness conveyed by the term "dark liquidity." While it may sound like the stuff of mediocre science fiction, and perhaps even be vaguely unsettling to realize how many shares are being traded in these dark, anonymous environments, hedge fund managers like them just fine.

In fact, dark pools are catching on. According to a January report from The TABB Group, by the end of 2006 nearly 10% of equity trades, some 420 million shares a day on average, were executed via crossing networks and dark liquidity pools. The TABB Group projected that volume would grow at a 40% compound annual growth rate over the coming years.

So what do dark pools have to do with instant messaging? Well, Pivot Solutions Inc., a Boston-based technology firm, sells as its primary product IMTrader, a combination instant messaging, electronic trading and research distribution tool for institutional traders. Using IMTrader, an enterprising trader could chat with buddies about the market, glean information about a possible trade, conduct research into the trade, send an instant message using FIX Protocol to a broker-dealer's (or multiple broker-dealers') order management systems to execute a trade, receive confirmation of the trade and see which broker-dealers responded first.

IMTrader, by the way, has applied to the U.S. Patent and Trademark Office for a patent to cover its instant message-to-FIX Protocol technology. The patent application gives a detailed description of exactly how the product works. One can find the application by visiting the Patent and Trademark office web site at www.uspto.gov , and conducting a quick search of published patent applications for application No. 20060026091. By way of a quick summary, the technology works like this: A trader can send a "natural language" instant message to a broker-dealer saying, "Buy me 100 shares of IBM at a limit price of $98 per share." IMTrader scans the message looking for word clues like "buy," "sell," or "limit" that indicate this might be a message containing a trade order. If it determines that it is a trade order, it converts the message to FIX Protocol and sends it on to the broker-dealer, who can then send it directly to the order management system, which will automatically understand it because it has been correctly formatted. Alternatively, in its patent application Pivot said it encourages traders to use a certain "cadence" that is more easily converted into FIX Protocol when sending a trade order. For instance, the above trade request might instead look like "buy 100 IBM limit 98" or even "b 100 IBM limit 98." IMTrader would convert it to FIX Protocol and send it on to the broker-dealer, who then confirms it and sends it on to the order management system.

Once the order is received, IMTrader also can process trade confirmation messages from the brokerdealer to the trader, and back again. This, according to Pivot's patent application, eliminates the need for buy-side traders to have a FIX connection to their broker-dealers. With IMTrader, the only FIX connection necessary would be between the broker-dealer's instant message system and its order management system. All that's needed between the buy-side trader and the broker-dealer is a communications connection that allows for the sending of instant message—in other words, any standard Internet or intranet connection over a local area network or wide-area network.

In December, Pivot introduced a new version of IMTrader with an important piece of added functionality: the ability to sweep dark pools of liquidity based on algorithmic trade orders. Now, traders can add the names of the dark pool networks just like they would add buddies to their buddy lists. If they want to send a trade to a certain dark pool, they simply type that dark pool's buddy name and their trade order and send it off to the broker-dealer via IMTrader. Likewise, they can send orders to conduct algorithmic trades, such as trades by volume-weighted average price or time-weighted average price, by including the term "algo" in an order.

Then in January, Pivot announced that it was partnering with UNX, an agency brokerage firm, to provide access to more dark liquidity pools. Traders can use IMTrader to send an instant message trade order to UNX asking UNX to sweep any of a number of anonymous electronic liquidity pools. Traders can specify which pools they want UNX to sweep by typing in the corresponding "buddy name" of the pool.

Ed McDonnell, senior vice president at Pivot Solutions, said the IMTrader/UNX partnership represents "a very lightweight way to extend algorithmic platforms and direct market access to the buy side."

He said buy-side traders spend 70% of their time during the day sending and receiving instant messages and searching for information. It only makes sense to integrate IM-based trading into a tool they're using most of the day.

Roughly 350 buy-side firms use IMTrader, and about 40 brokers do. Most of the buy-side firms are hedge funds, a few are pension funds. Among the hedge funds, IMTrader users range in size from $50 million in assets to $8 billion, Mr. McDonnell said. In the past year, almost all of the new users are firms with more than $1 billion in assets under management.

Pivot spun out of Eze Castle Integration in 2004. In 2005, IMTrader became part of AOL Instant Messenger's certified partnership program, which allowed IMTrader users to incorporate their AOL Instant Messenger buddy lists and screen names.