Trader Monthly on Liquidnet

I'm almost ashamed to admit I read Trader Monthly (one read through the magazine, and you'll know what I mean) but the subscription was free. I admit there is some useful content in there, of course mixed with an endless parade of luxury goods and an underlying encouragement to publicly flaunt wealth in a manner more suited for MTV Cribs than for white-collar professionals...but I digress.

One such item was an interview with Seth Merrin, founder of Liquidnet, the institutional block-trading network that is making a big dent in equity trading.

Here's the skinny on what Liquidnet is:

Liquidnet now rates among the all-time revolutionary trading entities. With some 300 buy-side firms trading anonymously with one another by keypad -- without ever letting a sell-side desk see them coming -- it owns an average daily volume of 30 million shares, with an average order size of 40,000. That makes it the thirteenth largest executor of NYSE orders, the eleventh largest on the Nasdaq -- and with Merrin projecting three more years of double-digit growth, it should soon crack the top 10. A recent infusion of capital from private-equity firms Summit Partners and Technology Crossover Ventures -- the pair plunked down $250 million for a 13.5 percent stake -- values the company at about $1.8 billion, or by one estimate almost as much as the valuation given the NYSE in advance of its upcoming merger with Archipelago.

Here are the key grafs on how Liquidnet is impacting its competitors (broker/dealer and exchanges). Excellent perspective on the situation:

TM: Who are your main competitors?

You could point to two types: One, the block-trading desks at firms like Goldman, Merrill and Morgan Stanley. Any half-million-share print done on Liquidnet was likely destined for one of those desks. And then there's the electronic competitors, such as ITG's POSIT. We surpassed POSIT's volume at the beginning of the year.

TM: What impact will the ArcaEx-NYSE merger have on your business model?

I don't believe it’s going to have an impact. I think it's great for the industry that the NYSE has an electronic offering now. I don't believe the hybrid is going to be acceptable and maintain market share, but at least they have an offering that's completely electronic. But the merger still doesn't address the needs of the institutional trader. The NYSE has an 80 percent market share today. They're not offering the institutions size. Even with this monopoly, their average execution size is still 400 shares.

TM: So Liquidnet is essentially capitalizing on this disconnect?

We've always been about creating a separate wholesale marketplace, something specific to institutional traders. This is a model that every other industry has -- except financial services. Can one store meet the needs of both wholesale buyers and retail buyers? The same store is not adequately equipped to handle a million-share trade as it is to handle a 200-share trade. Link to Interview

If there is an investment business that was built in the spirit of Web 2.0, Liquidnet would be about as close as you get.

Effectively, Liquidnet said "we'll offer a better service and charge less money" - the logic being that turning a billion dollar market into a hundred million dollar market is fine if the hundred million goes to you. (This is what Google is doing to newspapers, television, etc...)

File these points on Liquidnet in the back of your head as to why Nasdaq and NYSE/Arca are not great businesses. Liquidnet is just one competitor among many.

I'm sure these major exchanges would go nuts (as would their backers) at the idea of being widely thought of as "retail" markets rather than institutional-quality "wholesale"...but it's already in the cards:

Why else would Nasdaq have an office in Times Square? - Ed

Comments

[pete]

I find it odd that there was no mention of Pipeline in here. It’s the fastest growing ATS in the world.