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October 1, 2010

ATSs Seek Alternative Businesses

By John D'Antona Jr. and James Ramage

Liquidnet and Pipeline Trading Systems know the block-trading business hasn't exactly been their growth engine as of late.

In fact, they have known this for some time, which is why the two alternative trading systems-identified by their block-trading crossing networks-both started diversifying into new business lines a few years back. And their latest product offerings point to the next stage in each firm's evolution.

Tereck Fares

Liquidnet is now branching out into research, expanding beyond its block-trading roots and moving closer towards a full-service brokerage.

In 2007, it bought Miletus Trading for its algorithms. It now hopes to increase its market share by raising its visibility among money managers. It is setting up research meetings between clients and companies, and branding these meetings as Liquidnet Research Forums.

In 2008, Pipeline expanded from its block-crossing network to develop technology that trades blocks through managing algorithms-its Algorithm Switching Engine. Its latest service, called Alpha Pro, constructs desk-specific strategies for trading.

Both Liquidnet's and Pipeline's switch in strategy marks a new direction for each, said Tereck Fares, director of equity trading at Chicago Equity Partners. But they represent a positive shift, he added, and a necessary one.

"The one-venue, one-trick pony doesn't work," Fares said. "As the average trading size got smaller, firms like Pipeline and Liquidnet found themselves almost forced to get more product offering."

Liquidnet is not abandoning its block-trading operations or shifting its focus away from the trading desk altogether, said Vlad Khandros, the firm's market structure and public policy analyst. Rather, it is looking to provide research and garner attention from portfolio managers, analysts and others. This would complement and augment its existing business, he said.

The firm's new research forums discussions provide Liquidnet's existing and potential corporate, private equity and venture capital clients access to chief executives, academics and other high-ranking corporate officials. Khandros said the forums have translated into increased trading volume.

For its part, Pipeline built its Alpha Pro software service to help the buyside pick trading strategies. Alpha Pro builds a profile of a trader's desk. To do this, it will sometimes analyze hundreds of thousands of trades an institution has executed, as well as the conditions around them.

When a trader receives an order from his portfolio manager to trade a stock, Alpha Pro then scans current trading conditions and compares them to the historical trading profiles it has built. From the comparable trading conditions, Alpha Pro recommends algo strategies that in the past generated alpha for the desk. The strategy is then executed in Pipeline's algo switching engine, said Fred Federspiel, the firm's chief executive. 


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