Friday, January 20, 2006

Liquidnet Opens to Sellside

Traders Online: The stock dealers and institutional traders complete interactive news and information service of Traders Magazine: "Four years after its founding as a buyside-only crossing network, Liquidnet has entered into deals with six "order aggregators" to supply its network with a steady stream of "retail-sized" order flow. Liquidnet, today, reports 1 billion shares per day available for trading in its network. The do-it-yourself trading platform currently averages about 40 million shares per day, placing it among the 20 largest brokerage firms.

Merrin would not disclose the identities of Liquidnet's new order suppliers, only saying they could be brokerages, ECNs and stock exchanges. The deals with the sellside radically revise Liquidnet's business model as well as its technological architecture.

Liquidnet's original plan was to build a gated community of buysiders only. That strategy has kept out the sellside sharks, but the downside has been low cross rates. Only 25 percent of orders in the system on any given day match up, Merrin said. Of those, only 25 percent actually trade, he added. That gives the system a 6.25 percent cross rate.

The new version of Liquidnet's software, dubbed H2O, took two-and-a-half years to build and is currently being tested at 20 money management firms. Liquidnet counts about 300 buyside firms on its network. Trading with the incoming order flow will be optional for Liquidnet members. Any trades that do occur will be done automatically at the mid-point of the bid-ask spread. Combining retail or retail-sized order flow with institutional block orders is considered something of a "holy grail" on the Street. With H2O, Merrin believes it is within reach."

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