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May 5, 2009

Liquidnet to Sellside: Send Blocks

By Nina Mehta

Liquidnet, the buyside-only dark pool that has built a business crossing blocks, is expanding its line-up of execution services. Recently, some brokers gained the ability to send block orders into Liquidnet H2O, a sister pool integrated with Liquidnet, enabling buysiders to execute against that upstairs liquidity.

The firm's objective is to give buyside customers another option to find contra-side liquidity. "We're not letting the sellside into Liquidnet and the sellside gets zero information, but we're bringing firm block liquidity from the sellside to the buyside desktop," said Jay Biancamano, global head of marketplace at Liquidnet.

The new product, called H2O Blocks, does not charge the sellside for executions. The fee for institutions will continue to be 2 cents per share.

Just as Liquidnet sources buyside liquidity in blotters, enabling institutions to execute against one another, Biancamano said, H2O Blocks brings reserve liquidity sitting in algorithms to buyside traders' desks. The firm is doing this, he said, because institutions on average match only about 15 percent of their flow against other institutions.

Liquidnet's 570-plus buyside members can choose to interact with H2O Blocks liquidity, just as they currently choose whether or not to interact with liquidity from streaming liquidity providers, or SLPs, coming through Liquidnet H2O. SLPs are mainly broker-dealers that send smart-routed algorithmic flow into H2O for automated executions against institutions. Firms will see a different icon in their Liquidnet application for H2O Blocks than they do for Liquidnet institutions and H2O streaming liquidity.

Laurie Berke, a principal at research firm TABB Group, notes that more than half of buyside firms say their ability to execute blocks is down from what it was a year ago. "If it can be demonstrated that they can avail themselves of new sources of block liquidity without selling an option on their order to a broker, they'll welcome the opportunity to see the flow," she said.

Nanette Buziak


Nanette Buziak, head of equity trading at ING Investment Management, said she's glad to have another way to source block liquidity. "Particularly for high-alpha trades, H2O Blocks will be another tool my team can utilize to access what I hope will be sizable block liquidity," she said. Who's on the other side of a trade is always a worry, she cautioned, but it's the trader's job to decide when and where to trade.

Liquidnet is rolling out H2O Blocks as the industry changes. Dark pools have become more mainstream and Liquidnet faces more competition.

Liquidnet's average daily volume in March was 64.1 million shares (double-counted), compared with 66.6 million in March 2008. Over that period, the industry's consolidated volume rose more than 50 percent.

The buyside has the upper hand when it comes to executing against H2O blocks, Biancamano said. Buyside firms with block contra-side flow can see the presence of a sellside block order (although not the size of the order).

Sellside firms cannot see whether there's a contra in the system. The buyside firm decides how many shares to execute and gets three-quarters of the spread.


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