Providers Seek Alternative Businesses
August 30, 2010
Liquidnet and Pipeline Trading Systems know that 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 firms--identified by their block-trading crossing networks--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.
Liquidnet is now branching out into research, expanding beyond its block-trading roots and moving closer to becoming 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 at money managers. Liquidnet is setting up research meetings between clients and companies--branded 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, the 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 other corporate strategists. This would complement and augment its existing business, he said.
"Liquidnet is spending more time with the decision makers," said Khandros, referring to portfolio managers and analysts. "We are working on strengthening partnerships with our 600 buyside firms to ultimately give them competitive advantages, while building the new social capital market--creating an issuer community and portfolio manager/analyst community, in addition to the trader community we've built over the past 10 years."
The 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--who provide insight into their respective companies and industries.
The conferences are global in scope, usually include several dozen attendees and cover topics such as macroeconomic trends, market structure and future trends in buyside trading. The ATS has held three already this year, covering agriculture, marketing and healthcare. A fourth conference on leading economic indicators is slated for either November or December.
Khandros said the forums have translated into increased trading volume both in Liquidnet's negotiated pool and through Supernatural, the firm's block algo suite. Supernatural lets buyside traders place orders in the dark pool, where they can either wait for a natural match or be routed to other venues if none is found.
For its part, Pipeline built its Alpha Pro software service to make it easier for the buyside to pick a trading strategy. Pipeline worked with J.P. Morgan Asset Management and AllianceBernstein to develop the technology.
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 in which they occurred.
