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June 30, 2003

Nasdaq's New Block Service

By Peter Chapman

Also in this article

  • Nasdaq's New Block Service
  • Page 2

But Traders Not Using Liquidity Tracker for Now

Market makers are giving Nasdaq's new block trading service the cold shoulder.

Trading through Liquidity Tracker, launched by Nasdaq last December, has ground to a halt. The anonymous order delivery service was intended to complement the transparency and automatic executions of SuperMontage.

But it has been a bust so far.

While not a trading system, Liquidity Tracker resembles the two ATSs, Harborside+ and LiquidNet. The new electronic service brings together trading counterparties for anonymous negotiations of large trades through instant messaging.

But unlike those two ATSs, Liquidity Tracker is aimed primarily at Nasdaq market makers. Some dealers gave Liquidity Tracker a trial run in December, but very few are using it right now, traders say.

Nasdaq would not disclose or comment on Liquidity Tracker's volume, but traders say it is negligible.

Nevertheless, Fred Federspiel, chief executive of e-Xchange Advantage, the technology firm that built and licensed the product to Nasdaq, is still upbeat. "It's still early in the game," he said. "We are just now getting the word out. We're just kicking it off."

Technically, Liquidity Tracker is analytical middleware that interfaces with both Nasdaq's ACT trade data repository and SuperMontage. As such, it performs two functions. One, it analyzes executions reported to ACT. Two, it acts as an electronic inter-dealer broker, coming between buyers and sellers using SuperMontage's directed order functionality.

Here's how it works. A market maker sends a non-liability, directed order to one of two special market participant identifiers - LQTR or LQTM. The order is priced and firm. The size is likely to be in the thousands of shares.

The order is received by Liquidity Tracker. The system then analyses all of the trades in that security reported to ACT by certain dealers within a given time frame. It looks for net buyers or sellers of at least 10,000 shares.

If Liquidity Tracker finds a net buyer or seller, it then forwards the order to the dealer or dealers. The first dealer to respond wins the trade. Neither the order recipient nor the order sender knows the other's identity until the transaction is complete.

Because the order is a non-liability order, a recipient is not liable under SEC Rule 11Ac1-1, or the "Firm Quote Rule," to respond. The order sender's pricing is firm, but the order recipient has no obligation to trade.

About 30 brokerages have signed agreements with Nasdaq allowing the stock market to use their ACT data as trade bait.

"When Liquidity Tracker gets an order, it creates a competition between those it has identified as likely contra parties," explained Federspiel. "They're filled on a first come, first service basis."

The service "mitigates" market impact, says Federspiel, because the matchmaking process is done in electronic secrecy. Valuable trade information does not leak out and cause the stock to move. Traders only communicate their interest to parties that have already traded 10,000 shares or more of the security on a net basis.

Concept Praise

Traders say they like the concept, but they are still balking at inputting their orders. Their reasons vary. One market maker at a large investment bank says the system is too gamable.'