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December 18, 2007

Liquidnet Beckons Program Traders

By Nina Mehta

Ten months after acquiring agency brokerage Miletus Trading, Liquidnet is entering the program-trading business with a premium-priced offering. The carrot it's holding out to buyside portfolio traders is efficient automated interaction with Liquidnet's pool of institutional orders.

Buyside portfolio traders can now access Liquidnet's buyside-only crossing network through the firm's LQTS desk. LQTS, short for Liquidnet Quantitative Trading Services, is the renamed suite of Miletus's algorithmic trading products. Versions of LQTS algos now provide integrated access to the Liquidnet pool and Liquidnet H2O's streaming flow from broker-dealers, in addition to executions in the public markets. These algos are called "Supernaturals."

Liquidnet has 350 members in the U.S., including 80 that are quantitative and 15 that focus on index-related trading. The latter two groups previously "had limited usage of Liquidnet because the functionality didn't allow them to trade the way they normally trade," said Alfred Eskandar, head of Liquidnet's corporate strategy group. "They may trade 500 to 1,000 names at once, and they can't negotiate 100 at a time."

The LQTS Supernaturals now enable Liquidnet to vie more effectively for the quantitative trading flow that ITG's POSIT crosses have captured over the years. ITG, which has many index players as customers, has long offered integrated access to the POSIT products through its suite of algorithms.

This streamlined interaction with the Liquidnet pools has also helped grow the old Miletus business by more than 120 percent over the last six months, according to Richard Johnson, an executive in Liquidnet's project management group and a former managing director at Miletus. LQTS, he said, now has more than 100 clients, including 30 to 40 new program trading and quantitative accounts that came aboard after Liquidnet acquired Miletus. (Liqudnet eliminated the broker-dealer customers Miletus had when it was acquired.)

LQTS Supernatural algos have a crossing rate of 15 percent to 25 percent for portfolio trades and 36 percent for single stocks, Johnson said. Because of its high crossing rates, which yield large executions with minimal information leakage, Liquidnet believes it can charge a premium rate for Supernaturals.

Traders using Supernatural orders pay 2 cents per executed share, regardless of where they execute. Customers using LQTS's traditional algos to access the markets continue to pay the commission rate they had previously negotiated with Miletus.

Several program traders told Traders Magazine they are skeptical Liquidnet will convince traders to pay 2 cents per share for all program trades. Liquidnet execs, however, say the savings in market-impact costs more than offset explicit commissions. LQTS has "unique access to the Liquidnet liquidity poolsno other brokerage firm can offer that," Eskandar said.