Best Dark Pool for Buy Side


Rather than try to be all things to all people, Liquidnet focuses on one core mission: providing a venue for institutional investors to efficiently trade large equity blocks.

“The singular driving force of everything we do is how do we create opportunities for the buy side to interact with the highest quality and largest scale of natural liquidity,” said Liquidnet Chief Operating Officer John Kelly. “As the trading environment continues to become more complex in both market structure and technology, it requires a firm like ours to sharpen its focus in delivering unique value to the buy-side community.”

John Kelly, Liquidnet  chief operating officer

John Kelly, Liquidnet
chief operating officer

Founded in 2001, Liquidnet’s clients include more than 700 asset managers with a total of $12 trillion in assets under management. The New York-based company expanded into the Philippines and Turkey in 2013, and its scale of liquidity now spans 41 markets across five continents.

Liquidnet’s value proposition lies in protecting the anonymity of the block trade while looking for ways to bring in safe, actionable liquidity from asset management firms, exchanges, brokers and corporations. The firm’s average execution size of more than 42,000 shares (or $1 million principal), is 150 times larger than that found on other trading venues, according to the company.
Liquidnet expanded its roster of clients by about 15% in 2012, which Kelly described as “a remarkably difficult year for institutional equity markets worldwide.”

The U.S. and Europe are mature markets, but Canada is growing rapidly, and Asia/Pacific is growing fastest of all in terms of buy-side players seeking dark liquidity.

As the impact of high-frequency trading continues to affect the cost of institutional trading, more investors will take a more active role in their choice of execution venues and turn to venues that provide deep liquidity in an “HFT-free zone,” Liquidnet predicted at the end of 2012.

For Liquidnet and SIX Swiss Exchange, 2012 marked the first full year of a fairly unique partnership wherein an alternative trading system and an exchange—traditionally competitors—joined forces to pool liquidity.

Having access to this additional liquidity enables SIX Swiss member firms to adopt an alternative strategy of directing more order flow to Liquidnet’s block trading pool.

“The arrangement was driven by our focus on making sure that we provide opportunities to trade safely in large blocks,” said Kelly. “Ordinarily, when SIX Swiss members get block orders, they split them up using algorithms into thousands of smaller orders and spread them across the globe. We provide SIX Swiss the opportunity to present large blocks to our members, which serves the interests of both SIX Swiss and Liquidnet.”

“The singular driving force of everything we do is how do we create opportunities for the buy side to interact with the highest quality and largest scale of natural liquidity.” John Kelly, Liquidnet chief operating officer

The SIX Swiss model “is something we are exploring with other exchanges around the world in 2013,” said Kelly.

Liquidnet’s global reach distinguishes it from similar liquidity models offered by independent firms, which are typically narrow in reach and scope.
“There is no other dark pool that is in every market in which we operate and achieves the executions we achieve,” said Kelly.

“The buy side has communicated the need to find alpha, and therefore liquidity, in a wider range of places,” Kelly continued. “Liquidnet provides the ability to interact with like-minded investors who have similar scale and are seeking alpha via a single front end.”

In addition to further global expansion, another 2012 initiative for Liquidnet was building out its commission-management offering, which is designed to help traders get best execution while paying their bills. “With Liquidnet, members can aggregate, manage, and analyze all of their commissions across brokers, currencies, and asset classes,” Kelly said.

Liquidnet has embraced algorithmic trading by developing its own suite of algorithms “which allow members to create orders that interact with our own member community and with other dark venues under tightly controlled parameters,” Kelly said.

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