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Robert Schuessler
Traders Magazine Online News

A Smarter Monkey

In this contributed piece, TIM noted that some traders do better than others when using data that has been run through certain analysis - that is, have used some form of machine learning to assist them.

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January 3, 2006

Liquidnet Opens to Sellside

By Peter Chapman

Four years after its founding as a buyside-only crossing network, Liquidnet has entered into deals with six "order aggregators" to supply its network with a steady stream of "retail-sized" order flow.

"We have created partnerships with six liquidity providers," Seth Merrin told Traders Magazine, "that will, in aggregate, provide us with over 600 million shares per day of retail-sized liquidity." Liquidnet, today, reports 1 billion shares per day available for trading in its network. The do-it-yourself trading platform currently averages about 40 million shares per day, placing it among the 20 largest brokerage firms.

Merrin would not disclose the identities of Liquidnet's new order suppliers, only saying they could be brokerages, ECNs and stock exchanges.

"We are not disclosing their names to our users," Merrin said, "and we do not want them to disclose us to their users." One brokerage exec whose firm operates an algorithmic business told Traders Magazine that his firm was approached by Liquidnet, but declined to participate in the new venture.

The deals with the sellside radically revise Liquidnet's business model as well as its technological architecture.

Liquidnet's original plan was to build a gated community of buysiders only. That strategy has kept out the sellside sharks, but the downside has been low cross rates. Only 25 percent of orders in the system on any given day match up, Merrin said. Of those, only 25 percent actually trade, he added. That gives the system a 6.25 percent cross rate.

The new version of Liquidnet's software, dubbed H2O, took two-and-a-half years to build and is currently being tested at 20 money management firms. Liquidnet counts about 300 buyside firms on its network. Trading with the incoming order flow will be optional for Liquidnet members. Any trades that do occur will be done automatically at the mid-point of the bid-ask spread. Combining retail or retail-sized order flow with institutional block orders is considered something of a "holy grail" on the Street.

With H2O, Merrin believes it is within reach.