Exchange operator Nyse Euronext is establishing a block trading joint venture with Bids Holdings, the Wall Street consortium that is setting up its own alternative platform for equity block stock trading.
The 50:50 JV will operate as operate as a facility of Nyse but will be accessible through Bids Trading platform.
In addition, the exchange says it will make an undisclosed investment in Bids Holdings.
Nyse Euronext says the venture will improve execution quality and access to liquidity in block trading.
Is a statement Duncan Niederauer, president and co-chief operating officer of Nyse Euronext, says: "We believe that this innovative co-branded approach with Bids Holdings will serve our clients and markets well by bringing block-size orders back into contact with active traders, algorithms, and retail flow."
Niederauer told Wall Street Journal (WSJ) reporters institutional investors have called on the exchange to make it be easier to trade large blocks. He said it was "the single biggest thing we hear from our customers".
The rapid take-up of e-trading in recent years, as well as the use of algorithmic trading methods, has resulted in a major decline in block trading activity at the exchange. According to a WSJ report, since January 2004 monthly activity in block trading at Nyse has declined 78%, from 494,600 trades to 107,800 trades last month.
But big block trades are profitable for exchanges like Nyse because they generate trading fees without using up the technology resources that thousands of small trades do, says the report.
Last year six investment banks - Citigroup, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley and UBS - set up the Block Interest Discovery Service (Bids) to enable users to anonymously execute block trades. A further six banks joined the initiative in March this year.
Tim Mahoney, CEO of Bids Trading, says the joint venture with Nyse Euronext will address the current inefficiencies in block trading, such as market fragmentation.
"Moreover, this initiative is an endorsement of our efforts to build the leading block interest discovery and trading system in the US," he adds.
The formation of the JV is subject to approval by the US Securities and Exchange Commission and certain corporate authorisations.
Last week Nyse Euronext said it was teaming with investment banks HSBC and BNP Paribas to establish an electronic block trading platform for European-listed stocks, called Project SmartPool.