Liquidnet Expands Targeted Invitations

Shanny Basar

Liquidnet, the global institutional trading network, is including targeted invitations in equities algorithms in Europe as new regulations will impact market structure in the region and make it harder to find liquidity.

Chris Jackson, Liquidnet

Chris Jackson, Liquidnet EMEA head of execution & Quantitative Services Group, told Markets Media: “One client said 20% of their order flow now comes from actively soliciting order flow from portfolio managers based on liquidity they see in the market. Targeted invitations have done an amazing job in generating new interest.”

Targeted invitations help the buyside find additional block liquidity by using data analysis to allow qualifying members to send anonymous actionable invitations to others who have recently traded or shown interest in a certain security. Unlike indications of interest, targeted invitations are firm and committed orders and are available only to members who fit the eligibility criteria. Targeted invitations are also only sent to three or four clients to minimize information leakage, while IOIs can be sent to thousands.

Liquidnet rolled out targeted invitations in the US and Asia-Pacific last year after launching in Europe in 2015. The multi-asset class technology was also first used for equities in 2015 and then expanded into fixed income in 2016.

Jackson continued that targeted invitations have generated $1.9bn of order flow in Europe in the first half of this year, with an average trade size of $2.3m. Average liquidity for targeted invitations has been 38% of daily volume and the largest trade has been $156m on each side.

Targeted invitations have been added to equity algos in Europe to make it easier and more efficient for asset managers to integrate them into their workflow and access liquidity in Liquidnet’s natural pool, external dark pools and the public market. The new functionality will be rolled out globally this year.

“The algos have a filter to only send targeted invitations for large illiquid orders. This is a block trading solution for MiFID II so the quality needs to remain high,” added Jackson. “We have three more new solutions in the hopper to help investors in their search for block liquidity under MiFID II.”

MiFID II, the regulations coming into force in January 2018, will change market structure by creating new types of venues and placing caps on trading in dark pools, with waivers for large-in-scale trades. In addition, the buyside is required to take ‘sufficient’ rather than ‘reasonable’ steps to achieve best execution, and to be able to provide evidence to show how this have been achieved.

Instinet, the broker owned by Nomura, said in a recent white paper that the changes in the trading landscape under MiFID II could be as stark as London’s Big Bang in in 1986, which eliminated the role of jobbers and radically redefined the role of stockbrokers.

“This time, it is the role of trading venues and institutions that will be transformed, as both clients and liquidity providers benefit from the ability to target liquidity and pricing down to the individual strategy level,” added Instinet.

Jackson said: “It will become increasingly difficult to find liquidity under MiFID II, so you could say that through targeted invitations we are opening up a unique ‘virtual’ pool of hidden blocks.”

The Instinet paper continued that market participants will need to deploy scientifically robust methods to ensure adequate sample selection and statistically sound results to satisfy the best execution requirements.

“The pricing power of proprietary traders will create a range of liquidity options, which will re-arm and empower institutional clients,” added Instinet. “However, thriving in a more tailored, individualised world will require managing a vast array of data, deploying well thought-out trading strategies and cultivating new industry partnerships.”

Mark Pumfrey, Liquidnet

Mark Pumfrey, Liquidnet

Mark Pumfrey, head of Liquidnet EMEA, said in a statement: “With MiFID II around the corner, everything we do is focused on giving the buyside the control that they need. We are arming traders with the tools and technology that can break down barriers to the liquidity they need, so they can get back to helping their firms capture alpha and improve performance.”

Liquidnet has also made its algo ranking model available in Europe, after being launched in the US, as part of its strategy to provide tools based on statistical information that gives the buyside more control over their orders. Members can weight factors in an algorithm and receive an audit trail to analyse the  impact.

Another arm of this strategy is Liquidnet’s purchase of OTAS Technologies earlier this year.  OTAS Technologies was founded  in 2011 to analyse market data and highlight actionable information for equities trading to fund managers in an easily digestible visual format.

Pumfrey told Markets Media last month: “The acquisition of OTAS adds a new dimension to Liquidnet sourcing natural liquidity. The buyside has chronic information overload and OTAS alerts can be tied to indications of liquidity in our pool based on past data and the member’s own filters.”

OTAS software analyses changes from the normal pattern in data such as insider transactions, short interest, options and credit default spreads and automatically highlights the most relevant signals for stocks in their portfolio for review. The firm also uses a natural language reporting technology which automatically generates alerts in plain English, rather than in charts or graphics, based on parameters set by the clients – which can include calendar events, price performance and short interest.  Clients can also choose the timeframe of analysis, the frequency of the report and a time of receipt.

Pumfrey said: “The OTAS data solution is a category killer for best execution under MiFID II as the whole process is auditable. We can time stamp the order, the OTAS alert and subsequent changes to the order.”

OTAS can be integrated with Liquidnet’s Virtual High Touch trading platform, although Liquidnet will also support OTAS on other front-end systems. Virtual High Touch includes data analytics, liquidity search tools and trading algorithms, MiFID II solutions and real-time market intelligence.

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