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January 2, 2007

ITG Gets Into Liquidnet's Face

By Nina Mehta

With new muscle behind it, Investment Technology Group is elbowing its way into an electronic business previously the sole province of Liquidnet: grabbing orders off buyside blotters before they wend their way into the marketplace. That hasn't sat too well with Liquidnet, which at presstime, cried foul and filed a patent infringement suit against ITG. Liquidnet claims ITG's technology violates its patent. ITG says the suit is without merit. Meanwhile, 20-year-old agency brokerage ITG, long a leader in electronic products for sophisticated money managers, is seeing volume increase on its POSIT crossing platform as a result of a new product and a new relationship with institutional titan Merrill Lynch.

The product, Block Alert, is a Liquidnet-like service that was known as POSIT Alert when it was launched more than a year ago. It is now the heart of a new joint venture with Merrill Lynch.

ITG's success in integrating Block Alert with the industry's top order management systems, combined with Merrill's institutional reach, is fueling the platform's growth.

"We've integrated Block Alert with Macgregor, Charles River and Eze Castle Software," says Steven Sorice, Block Alert's new chief executive. Sorice says arrangements with other OMSs are in the works and that institutional investors can integrate Block Alert into proprietary OMSs as well.

Macgregor represents Liquidnet's single largest source of institutional orders, accounting for up to half of its flow, sources tell Traders Magazine. ITG, which bought Macgregor over a year ago, says Block Alert is simply another destination for the OMS's customers and that customers will not have to choose between Block Alert and Liquidnet.

Block Alert does not disclose the number of clients using the system or how much is executed within the network. But the Block Alert joint venture has been gaining clients and building its distribution and volume, Sorice says.

Receptivity

Mike Stewart, Merrill's global head of cash equities trading, seconds that point. "Merrill's customers' receptivity to the Block Alert product and the concept has been extremely high," he says.

ITG executives last reported POSIT volume about a year ago, telling industry analysts it was matching about 35 million shares per day. This summer former ITG president Ray Killian told analysts that Block Alert executions were fueling the growth of POSIT volumes. He expected a "significant step up in POSIT volumes" as a result of Merrill's enormous distribution system and customer liquidity.

In early November, Block Alert's average execution size was 35,000 to 40,000 shares, according to Sorice. Block Alert is only the second service, after Liquidnet, to gain access to orders residing on money managers' order management systems.

Like Liquidnet, it surveys the contents of the OMSs and alerts traders if a contra-party exists for one of their orders. Unlike Liquidnet, however, the system does not prompt the traders to enter into a negotiation. Instead, if the parties agree to trade, Block Alert matches the two sides and executes the transaction in POSIT Now, a nearly continuous crossing system. Orders are matched at the midpoint of the national best bid and offer. No size information is disclosed until the trade executes.

Block Alert also enables matches between orders on buyside OMSs and POSIT Now customers. Both buyside and sellside firms can have alerts distributed to potential matches, although only buyside firms with orders in their OMSs can receive alerts.

Block Alert's move onto Liquidnet's turf is part of a larger plan, spelled out by top ITG executive Ian Domowitz. He has said in the past that integrating execution management systems with OMSs on the trading desktop was the crux of ITG's strategy to expand its relationship with clients.

A spokesman says Liquidnet is integrated into 18 third-party OMSs and a dozen proprietary OMSs and has a strong track record with the buyside.