Liquidnet Prepares for ‘Brave New World’

Shanny Basar

Liquidnet, the institutional block trading platform, said many market participants are underestimating the impact of MiFID II on fixed income as the new regulations will usher in a “brave new world”.

The firm launched a fixed income dark pool in September 2015, adding to its established dark pool for equities. Mark Pumfrey, head of Europe, Middle East and Africa at Liquidnet, told Markets Media that the fixed income platform had 74 clients in Europe last year and is expected to grow to 100.

Pumfrey added: “Last year the fixed income platform had $2bn of daily liquidity in European bonds. In the year to date that has grown to $2.5bn and match rates have also increased.”

A recent survey by Greenwich Associates found that half of the  US fund managers plan to add a fixed income execution platform in the coming year. Greenwich said: “Liquidnet tops that list, with investors drawn to the platform’s ability to seek out natural matches via blotter-scraping, which enables the trader to see benefits without much additional effort. While Electronifie is exploring its options, TruMid revamped its technology and parts of its model and is seeing early success with the updated approach.”

In Europe MiFID II will come into force in 2018 and introduce new regulations for pre-trade and post-trade transparency. Pumfrey argues that the regulations will make Liquidnet more appealing as the platform already meets these requirement.

“2017 will be a year of great change for the industry and many participants are underestimating the impact it will have particularly on fixed income,” he added. “It will be a brave new world.”

MiFID II will also impact equities, particularly through the caps on trading volumes in dark pools and the unbundling of payments for research from trading commissions, which should favour independent trading venues.

Pumfrey said: “Trading in dark pools is more popular than ever with institutional investors – it currently makes up more than 15% of overall trading volumes and is expected to grow. However, not all dark pools offer the same value to investors. We are in a unique position as 94% of our volume is above the large-in-scale threshold.”

Large-in-scale trades, above a minimum size, are exempt from the dark pool volumes caps under MiFID II. Rebecca Healey, head of EMEA market structure and strategy at Liquidnet, interviewed 53 European-based global heads of dealing last year. She found that nearly half of the buyside respondents plan to increase their proportion of large-in-scale activity post-MiFID II.

She said 19% cited Turquoise Plato Block Discovery, the London Stock Exchange’s venue, and 15% cited dark aggregators as preferred destinations in the dark, but nearly a third still value access to broker dark pools.

“The challenge for the buyside is understanding how the demise of broker dark pools as we know them will impact the future dark landscape – particularly given that three-quarters of respondents stated they had either received insufficient or no information from brokers as to how their dark pools will evolve into Systematic Internalisers post MiFID II,” added Healey.

She predicted that dark trading is more likely to change into alternative forms of dark activity rather than automatically switch to lit venues, following in the footsteps of similar regulatory attempts in both Canada and Italy.

As MiFID II will reshape the trading landscape for both venues and order types, Liquidnet has been building out is European Execution & Quantitative Services team. The EQS group advises Liquidnet’s buyside members and institutional clients on algorithmic strategies, trade analytics, and quantitative products and services.

Pumfrey said: “Clients have significantly increased their use of our broader execution strategies, and our dark aggregation volumes have quadrupled over the last two years. Algos used to be 10% of our business and have grown to one third.”

Last month Liquidnet announced the appointment of Dan Squires as a sales director focusing on European hedge funds. Squires said in a statement: “As regulations like MiFID II bring tremendous change to the industry, Liquidnet’s equities and fixed income platforms are very well positioned to drive innovation in the market and allow investors to trade efficiently inside the spread in total anonymity and, hence, ultimately improve their investment performance.”

Last November the firm launched Liquidnet Virtual High Touch, a new category of buyside technology that brings together advanced data analysis, adaptive learning algorithms, unique liquidity search tools, and real-time analytics. As part of the launch Liquidnet announced an upgrade to its Algo Ranking Model, which generates a complete profile of an order before ranking Liquidnet’s Next Gen Algos according to the trader’s execution objectives.

“Liquidnet’s Algo Ranking Model will be launched in Europe in the coming month and there is strong demand for it given the data and best execution requirements of MIFID 2,” said Pumfrey.


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