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The Liquidity Problem

Maudlin Economics Jared Dillian examines stock market liquidity.

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April 30, 2001

Liquidnet System to Keep Traders Afloat?

By Staff Reports

Liquidnet may have more success than the failed OptiMark in bringing institutional customers together anonymously.

With information leakage and liquidity of paramount concern, Liquidnet hit the ground running last month.

The Internet-based alternative trading system had average daily volume of 10.4 million shares in its first days of trading. About 60 percent was listed volume while 40 percent was OTC trades.

The entry of Liquidnet caused one analyst, Jeffrey Baker at W.R. Hambrecht in San Francisco, to issue a sell recommendation on the stock of ITG. The firm operates the rival POSIT system. ITG's stock price subsequently dropped 9.4 percent (but later recovered) when Baker said Liquidnet could eventually eat some of POSIT's lunch.

POSIT was handling some 36 million shares a day, as of last month. Some experts said it was premature to draw conclusions. POSIT and Liquidnet both charge a basic commission of about 2 cents a share.

So far Liquidnet is faring better than OptiMark, a system with a similar goal but a radically different approach. OptiMark collapsed because it was unable to drum up enough liquidity.

"Our goal is to bring the liquidity directly to our members - reversing the previous paradigm of searching for liqudity," said Liquidnet co-founder Seth Merrin, who is chief executive at the New York-based firm.

Liquidnet counts about 40 institutional users. One of them, AIM Advisers in Houston, Texas, said the system is easier to use than OptiMark. But head trader, Kevin Cronin, did note that Liquidnet needs more

liquidity to succeed.