New York-based trading platform operator Liquidnet may not quite be able to claim it has conquered the institutional equities world, but it certainly spans it. Since its launch in 2001 as an off-exchange platform exclusively serving the block-trading needs of the buy side, Liquidnet has established a presence in 39 equity markets, most recently adding Indonesian stocks as of January 25.
A few days before that, Liquidnet revealed a new dimension to its global strategy by announcing a cooperation agreement with SIX Swiss Exchange. While Liquidnet has stated its intention to seek out multiple partnerships of this type, it has dubbed the SIX deal a “landmark agreement,” and a spokesperson says it is a “top priority” to launch their joint offering in the second quarter.
By enabling their respective participants access to each other’s markets and liquidity, Liquidnet and SIX are touting a potentially more efficient and innovative market structure than either could assemble on its own. In effect, they are blurring the distinction between the conventional exchange approach of listed, transparent prices and that of the non-displayed dark pools, of which Liquidnet is a prominent and pioneering example.
Each organization, which prides itself on technological leadership and an ability to serve a marketplace increasingly buffeted by volatility and the effects of high-frequency trading, sees an opportunity to make strategic gains. SIX Swiss Exchange, the principal subsidiary of Zurich-based SIX Group, ranks in the second tier of European securities markets, below London’s LSE Group, NYSE Euronext’s European exchanges and Deutsche Börse of Frankfurt.
Among alternative trading systems – designated in Europe as multilateral trading facilities (MTFs) – Chi-X Europe, an offshoot of the Instinet brokerage now owned by Nomura Holdings of Japan, has volumes rivaling those of the giants, while MTFs affiliated with BATS Global Markets of the U.S., the London Stock Exchange and Liquidnet are trying to gain ground. (Nasdaq OMX Group, which has a London presence and owns the leading exchanges of the Nordic countries, retreated from the MTF fray last year.)
John Barker, the managing director in charge of Liquidnet Europe, told the Financial Times in December that Liquidnet was in a position to accelerate exchange organizations’ plans to bring alternative liquidity access to their customers. The newspaper reported that Liquidnet was in discussions with 13 exchanges outside North America, but the company is commenting only on its relationship with SIX.
Barker called it “a new opportunity for both them and us to access the wholesale market and execute large block trades with the global institutional trading community through a safe and secure trading environment. We continue to build a unique global liquidity pool for investors, creating opportunities to trade in sizes that are unrivaled. This service is therefore good news for both our buy-side clients and SIX Swiss Exchange members, who will be able to tap liquidity that is not exposed to public markets.”
Christian Katz, CEO of SIX Swiss Exchange, called Liquidnet Europe “the most profitable and stable MTF in Europe” and said their cooperation “further establishes SIX Swiss Exchange as the independent investment network of choice, linking all our members to the global active investor community.”
Katz said the partnership will result in an additional “over the exchange” service for SIX members, coming after the establishment of an exchange traded product segment. He added that members will gain from “the interaction with the buy side who are party to Liquidnet’s non-displayed block liquidity pool. Having access to this additional liquidity will greatly simplify and accelerate our members’ trading activities, allowing for improved investment returns by simply adopting a strategy of directing more order flow to this block trading pool.”
The companies’ press release of January 20 provided further operational detail: “After minor changes to the Swiss Exchange’s standard trading interface, [members] will be able to direct their flow towards this new service. The minor upgrades include a new venue code, a new trade type code, and new order condition for minimum fills which will enable investors to expose larger blocks without compromising on match sizes. Once the upgrades are completed, members only need to update their clearing and settlement instructions for international securities.”
Liquidnet and SIX said price improvement will be available on all trades, typically amounting to between 5 and 20 basis points, on top of the elimination of market-impact costs that is a hallmark of Liquidnet’s liquidity pool. Trading of large blocks of shares on displayed exchanges brings a risk of market impact, or price declines, as traders become aware of the large number of shares being unloaded.
Both Liquidnet and SIX have reported strong recent performance. SIX Group’s Swiss Exchange and Scoach structured products market increased total turnover 18 percent between December and January, to 101.6 billion Swiss francs ($108.6 billion). Liquidnet’s fourth-quarter average daily volume of 50 million shares in the U.S. was 17 percent higher than in the third quarter. Liquidnet Europe, which set a single-trade record of €133.2 million ($184.3 million) in principal on November 24, also saw a quarter-to-quarter increase of 57 percent in program and algorithmic trading activity.
Jeffrey Kutler is editor in chief of Risk Professional magazine, published by the Global Association of Risk Professionals.
