The Buy Side Seeks Liquidity in Hosted Pools

There is a lot of buzz around the rise of private rooms or hosted pools within alternative trading systems (ATSs), reflecting the latest wave of innovation in equity market structure. But what is the buy side getting out of them? 

At an industry conference on ATSs hosted by Tabb Forum in late February, buy-side firms described hosted pools as technology solutions which allow them to interact with certain brokers or liquidity providers that lack their own platforms.   

Shedding light on why the buy side would want to interact with a broker in a hosted pool, one head of global trading said: “the engagement is easier to measure, and in a bilateral interaction, market makers can give a better price.”   

Firms that offer hosted pools – or side rooms within their ATSs – say they allow broker- dealers to segment their order flow and control which counterparties they invite to participate.  

“Segmentation has always been in US equity markets, and participants want to choose who they trade with at different stages of their flow,” explained Roman Ginis, CEO of Imperative Execution, which operates IntelligentCross ATS, the No. 1 ATS in volume for NMS Tier 1 stocks, according to FINRA’s Weekly ATS Reports. 

When a broker wants to create a hosted pool, they become the host and choose who they want to invite to participate. “A Hosted Pool is another means that allows subscribers to control their order flow,” explained Ginis, speaking at Tabb Forum’s event on Feb. 24.  

The firm can create a pool for the broker which is the subscriber to the ATS. It could be a broker internalizing client orders or choosing to match at the midpoint of the national best-bid-or-offer (NBBO) or a spread, he noted. They can set a minimum order size or use conditional orders, or not, and with whom they decide to trade with is entirely up to them.”   

Overall, the rules for matching and trading are the same as in the broader ATS.  But it’s the host in a private room who sets the rules of engagement. “They can be bespoke. It doesn’t have to follow the ATS’s listed rule set,” said an electronic market maker which participates in hosted pools.  

If an order does not execute in a hosted pool, it can be routed to the main ATS or to other destinations. Another option is that a host could designate a single order to interact with multiple hosted pools on the ATS. 

Though hosted pools have existed for a long time, such as in the upstairs market where voice brokers matched block trades, why are they gaining so much attention?   

Some speakers suggested that hosted pools are an outsourced version of single-dealer platforms. Instead of a buy side firm needing to directly connect to an SDP, if the firm is already connected to an ATS, they can open a private room there. 

Transparency Questions

Given that hosted pools within ATSs are a relatively new phenomenon, no one has a clear picture of how much volume is being executed in hosted pools and how many hosted pools are in existence. 

In 2024, Hosted Pools accounted for a little over 5% of the average volume at Imperative Execution, while 95% was executed all-to-all in its main order books, said Ginis – referring to both the IntelligentCross Midpoint and ASPEN order books. 

ATSs describe their operations in detail, including the rules and order types of their hosted pools, on their ATS-N forms, which are publicly available on SEC’s website.  A speaker from FINRA said they would expect to find information on the hosted pools mentioned in the Form ATS-Ns. 

“There is always a push/pull on how much transparency an ATS should or should not have, and a lot of disclosure and detail is required on the Form ATS-N,” suggested an equity market structure expert. 

With the increase in off-exchange trading for US equities now accounting for more than 50% of volume, some industry participants have raised concerns around transparency and fragmentation of liquidity.  

Currently there are 20 U.S. stock exchanges and more than 30 ATSs competing in the US stock trading ecosystem.  In December, the off-exchange market share reached 51.5%, but non-ATS volume by the major retail wholesalers accounted for approximately 30% of the volume. “In the second half of 2024, there was a surge in off-exchange trading, mainly driven by retail participants and wholesale activity,” wrote MEMX in key trends for a banner year in markets. 

Meanwhile, ATS platforms, mainly used by institutions, handled a market share of around 12% across 27 platforms while single-dealer platforms (SDPs) accounted for about 5% across 6 platforms. 

Buy-side firms don’t want to post orders in the lit market when they are trading because larger trade sizes can move the price and leak their intentions. 

A new breed of ATSs has gained market share from institutions recently with innovations such as trajectory crosses and periodic auctions. Several buyside traders said they like innovative and disruptive models that ATSs have brought to the traditional price/time priority exchange models – naming Intelligent Cross, OneChronos, and PureStream. 

In March, Bloomberg ‘s article on private rooms reported that CastleOak Securities, a New York-based minority-owned brokerage, wanted to trade with like-minded businesses, so it’s using a private room provided by the ATS operator OneChronos. 

But not all ATSs provide hosted pools. “We believe in all-to-all trading,” said Armando Diaz, CEO of Purestream Trading Technologies the ATS event, noting that private rooms are a way to curate the participants’ liquidity, but aren’t a scalable solution for institutions.

In the case of Purestream’s trajectory cross, the ATS provides real-time fills against streaming liquidity at a certain percentage of volume (POV) rate by referencing 100% of the volume that’s taking place in the overall stock market.  

As ATSs create specialized pools with different order types and matching rules, some ATSs are providing trajectory crosses in hosted pools as well. 

“There’s a couple of other ways to match that are interesting to the institutional community such as VWAP crosses,” said Ginis. In their Hosted Pools, Intelligent Cross supports VWAP order types if participants want to use them.  

So, how does the buy side navigate the maze of stock exchanges, ATSs and hosted pools? 

One systematic buy-side trader said the firm has created a framework for analyzing liquidity, looking at all the venues – whether it’s an ATS or hosted pool. The firm tries to quantify how much liquidity they get from each venue, and whether it has some unique liquidity.  It curates the various types of liquidity into high quality and low quality. To create that kind of framework takes a lot of work, reading all the ATS-Ns, talking to all the ATSs and different types of players within each tier about how the interactions work. Additional transparency would be helpful, said the trader. 

Where are Hosted Pools Headed?

Looking to the future, hosted pools could be a novel mechanism for introducing competition into the retail space, noted the electronic market maker. There’s been a ton of discussion in the industry about inaccessible liquidity –referring to retail investor orders routed to off-exchange wholesale platforms. 

If a retail broker wants to provide midpoint fills to their investors, it could have multiple liquidity providers providing liquidity into a hosted pool that offers midpoint fills. “That experiment is well underway,” said Ginis, adding: “We see some brokers getting better execution quality.” 

If an institution wanted to interact with retail flows, it would need a place to host it, said the global head of trading at a buy-side firm. 

In the case of hosted pools, “this is not just a retail story,” said Ginis. “This is about best execution and how institutions and broker dealers can gain better control,” he said. “It’s another tool and it’s up to participants to decide how much they want to use it.”