Liquidnet Sheds Light on its Int'l Exchange Strategy

This morning, Liquidnet held a media briefing at its New York headquarters to discuss the strategic direction of its trading business and efforts to partner with exchanges in international markets.

In opening remarks, Liquidnet’s founder and CEO Seth Merrin, said, “There are still huge barriers to investing globally. Brokers are conduits to those exchanges and this adds up to enormous, time, cost and strategy.”

While Liquidnet has 650 institutional investors as members collectively managing $12.5 trillion equity assets, Merrin said that 80 percent of those investible assets are in the United States, and 75 percent of those assets are invested at home.

Merrin pointed out that there are 45,000 equities available internationally, and only 5,000 opportunities in the U.S. “The world is bifurcating into the GDP haves and have nots,” said Merrin.

With the sluggish U.S. equity trading volumes (down 22 percent year over year) it’s not surprising that dark pools would turn to focus on international markets. Liquidnet’s strategy with foreign exchanges seems quite innovative. At a time when mega exchanges like NYSE Euronext and Deutsche Borse are consolidating while other merger deals such as LSE and TSX are falling apart, smaller exchanges are looking for ways to remain independent and grow their liquidity. “If you think about the LSE and TSE falling apart, that’s an opportunity for us,” said John Barker, head of Liquidnet International, suggesting that unwed exchanges will now be searching for a solution.

Last week, Liquidnet launched a new platform with SIX Swiss Exchange giving Swiss brokers access to block liquidity. “It creates a dark pool for Swiss Stock Exchange. They now have a global liquidity pool,” says Merrin, adding that it also opens up more trading volume for Swiss Stock Exchange and it allows exchanges to do what they are supposed to do – to create new services and products.”

The Swiss Exchange has 124 brokers that are now allowed to access Liquidnet’s negotiated block liquidity pool. The integration between the two platforms allows blocks in Swiss equities to come into Liquidnet, according to Barker, who is based in London and who spoke at the New York briefing. While exchanges are single market focused, this partnership will give the Swiss access to a total of five European markets. Next, Liquidnet is going live with the four next major European markets, – UK, France, Germany and the Netherlands, and plans to add other markets. Apparently SIX Swiss Exchange had a previous block system and they closed that down.

Barker said Liquidnet is talking to other exchanges about similar block liquidity linkages and has signed a second exchange, which it was not at liberty to reveal. It also has three or four exchanges in the pipeline.

Why would overseas exchanges be interested in linking up with Liquidnet? Exchanges facing competition from MTFs like BATS and Chi-X, may see this as a way to reclaim their market share. Per Loven, head of Liquidnet International Strategy, said Liquidnet creates an off-board OTC market and then brings it back to brokers who in turn bring the trades back to exchanges. For instance, any trade in Swiss equities is reported back to the Swiss Exchanges, which enables them to get the market share and eliminates fragmentation. “We’re trying to address transparency and fragmentation. We think this can fix some of the market structure changes,” says Per Loven, head of Liquidnet International Strategy.

But one reporter asked why Liquidnet was pursuing this strategy now, since it had been around for 10 years. Barker said that Liquidnet needs maturity in the region before (exchanges) will consider the firm as a partner.

Overall, Liquidnet’s international strategy is gaining momentum. In the first quarter, Liquidnet traded $53 billion for the entire quarter in all international regions (EMEA, APAC, Latam and Canada). Revenue totaled $40 million in Q1 from all the international regions. For the year, Barker says the firm is forecasting $82 million, up from $66 million last year.

In Europe, the firm has 50 percent of asset managers on board, so it still has a strong room for growth, noted Barker. It has $27 billion of order flow in the system from Europe and Asia, which means it has a core base of institutions on board and in the system, he added.

Asia Pacific is the fastest growing region for its global buy-side dark pool. Tracey Windham, Liquidnet’s head of Asia Sales, who is based in Hong Kong, said the concept of a dark pool was foreign to traders when the firm began in Asia in 2007. It started with 30 members and now has 200 members globally. Liquidnet’s pool is now $10 billion a day in volume, 40 percent larger than it was at this time last year.

While Liquidnet covers 39 markets across five continents, the Americas, with $56.6 billion of average daily liquidity, is still its biggest block liquidity pool. But judging from this briefing, that could change in the future.