Liquidnet to Build Out Algo Business

Shanny Basar

Liquidnet, the institutional block trading platform, is looking to expand its Execution and Quantitative Services Group, which had year-over-year volume growth of 211% in 2015.

In 2014 Liquidnet had launched the EQS group in New York to design, implement, and customize Liquidnet’s suite of execution algorithms and analytics while also providing quantitative research and market microstructure insight to its network of asset managers.

Chris Jackson, European head of Liquidnet’s EQS Group, told Markets Media: “The EQS business is going to be a big growth area and we continue to build out our capabilities in this space.”

Jackson joined Liquidnet to grow the EQS team in Europe in March 2015  from Citi where he was head of execution sales for Europe, Middle East and Africa.

He said the growth in the EQS business last year was largely driven by the Liquidnet Dark algorithm. In Liquidnet Dark, orders rest conditionally in the Liquidnet dark pool to maximise trading with a natural block while the algorithm searches intelligently to take advantage of possible liquidity from external venues.

This week Liquidnet announced the launch of its Next Gen algo suite in Europe, Middle East and Africa. The Next Gen suite includes the launch of Barracuda, a new liquidity seeking algo which has been designed to simultaneously seek a large block in Liquidnet whilst opportunistically searching for available liquidity across both lit and dark markets. After the Next Gen algos were rolled out in the US in August 2015 there was a 61% year-on-year increase in average daily volume driven by algorithmic execution according to Liquidnet.

“The Next Gen algos build on that core dark aggregator [Liquidnet Dark] but add flexibility and choice to the search in lit venues,” Jackson added. “This flexibility has become more and more important for our members ahead of MiFID II’s volume caps.”

MiFID II, the incoming regulations covering European financial markets, places double volume caps on activity in individual dark pools as well as aggregate dark volumes outside the large-in-scale waivers.

Jackson said: “We are perfectly positioned for clients searching for size in Liquidnet’s institutional pool and, combined with our Next Gen algos, Liquidnet clients can also search for liquidity in both dark and lit markets.”

Per Loven, head of corporate strategy at Liquidnet, told Markets Media: “Our algos are built to work well under MiFID II so we already have a foundation for the future. Market structure is becoming more and more complicated and we are helping our clients navigate that world.”

Despite the overhang of the MiFID II regulations, the value of equities traded in dark multilateral trading facilities in Europe rose by 45% last year while the volume of shares traded increased by  25% according to agency broker ITG.

Rob Boardman, EMEA chief executive of ITG, said in a statement: “Despite the impending caps, the increase in dark trading in 2015 demonstrates that the buyside finds significant value in dark liquidity, and we expect that this demand will continue even after the implementation of the MiFID II rules. This increasing demand among institutional investors suggests that new regulatory thresholds are too restrictive, particularly for large-cap stocks.”

Liquidnet said in a statement that it had record performance in Europe last year. Total principal traded was $133.2bn, a 9.9% increase on 2014, and average trade size was $1.5m. Buyside members in continental Europe traded $3bn last year, more than twice as much as in 2014. Last October Liquidnet set records for total principal traded of $1.1bn in a single day and  $15.9bn for a single month, beating the previous monthly high by 28%.

Mark Pumfrey, Liquidnet’s head of Europe, Middle East and Africa, said in a statement: “Independent research by LiquidMetrix shows we deliver, on average, 97 basis points price improvement compared to volume adjusted prices in lit markets at the time of trade. Our business momentum has continued into 2016, and we have already seen a $1bn-plus day in total principal traded.”

Loven said Liquidnet will continue to build out its core equities business as clients are being more forensic about measuring execution quality ahead of MiFID II implementation.

“We will be introducing innovations in 2016 such as advanced tools to provide quantitative, in-depth real-time transaction cost analysis, to provide insight on trading behaviour,” he continued.

MiFID II’s best execution requirements also places the onus on fund managers to measure and monitor their trading so they can evidence they have met the best execution requirements. Buyside firms will have to justify why they have executed trades in a certain way in specific market conditions, dependent on any relevant instructions from the client.

Loven said: “We will continue to build out our core equities business after a record fourth quarter and year. EQS is a big opportunity and focus and so is fixed income.”

In 2014 Liquidnet acquired bond trading platform Vega-Chi as the fixed income market becomes more electronic and banks have become less willing to provide liquidity due to capital constraints. In September last year Liquidnet announced the launch of a fixed income dark pool for trading corporate bonds among asset managers in the US, Canada and Europe.

“We are in the early days of fixed income but have exceeded expectations both internally and externally,” added Loven. “Our focus is to continue to onboard more members and increase liquidity opportunities.”

It is possible that when an electronic fixed income market has become more developed, Liquidnet could design algos for fixed income execution.

Loven said: “We are still at the beginning of structural changes in the fixed income market but in the long-term it will share attributes with the equity market. There is no reason a trading model like Liquidnet should not work as well in fixed income as it has in equities.”

Featured image by Dmitry Nikolaev/Dollar Photo Club

Related articles

  1. Deutsche Borse-LSE Merger in Focus

    Instinet Fox River Quant Solution will initially be rolled out in the Americas.

  2. Algos, Post-Trade Top FCM Concerns

    Instinet's Anushree Laturkar says investing in research and analysis is key to improving client outcomes.

  3. The new platform launched via a partnership with BestEx Research.

  4. It is the first liquidity-seeking algorithm on Atlas, the equities trading platform introduced in 2019.

  5. Algorithms in Focus

    Strategy Studio allows brokers to create their own execution platforms.