Institutional trading volumes in the public markets may still be languishing, but new figures from independent block crossing network Liquidnet suggest buy-side investors are regaining confidence.
In recent weeks, Liquidnet has seen daily order flow in Europe reach $20 billion, having dropped to $12-14bn in the first quarter. At the same period in 2008, daily volumes were at $30bn. Liquidnet specialises in executing equity orders in large size and its volumes can serve as a proxy for the trading activity of big investment groups that typically buy and sell stock in large blocks.
John Barker, managing director, Liquidnet Europe, acknowledges that, in line with other venues, Liquidnet felt the impact of lower trading volumes across Q4 2008-Q1 2009. But he asserts that there are strong signs that institutions are coming back to the market.
“Another strong indicator is that we are now seeing buys outstripping sells in the US for the first time in a long time. In Q4 2008, you would often see three sells to one buy,” says Barker.
Unpredictable trading conditions in the second half of last year may have caused a temporary dip in the appetite for off-exchange or dark liquidity, as traders worried about the risk of resting orders too long during extremely volatile markets, but buy-side traders now appear to be looking beyond the low volumes on lit venues.
In a record quarter for signing new European clients, Liquidnet has also signed its first Spanish and Italian clients and expects two of Germany’s biggest asset managers to go live during Q2.
Indeed, the proliferation and growing market share of dark venues, not just buy-side-focused crossing networks like Liquidnet, but broker-owned and third-party dark pools, has prompted a regulatory response. Many such platforms are based in London and the Financial Services Authority (FSA), the UK regulator, has narrowed its definition of the rules under which they operate, including the MiFID pre-trade price transparency wavers that enable venues to provide client anonymity.
The FSA has asked Liquidnet to make some changes to its trade reporting, which will result in a switch in reporting venues for UK trades from the London Stock Exchange to Markit BOAT, which the firm already uses for post-trade reporting of European trades.
“The ongoing evolution of regulation on dark pools and crossing networks is a natural progression from MiFID,” says Barker. In time, Barker suggests that regulators might also simplify the regulation of broker dark pools and internal crossing engines by requiring all to adopt multilateral trading venue status under MiFID.
2009 will see Liquidnet broadening its European trading capabilities, according to Barker.
Liquidnet Supernatural, which gives buy-side orders the option to access sell-side flow, is scheduled to go live in Europe later this year. Previously branded as H20, the service enables US clients of Liquidnet to tap order flow from more than 20 ‘streaming liquidity partners’, including brokers, exchanges and electronic communications networks.
The firm will also expand its program trading capabilities to Europe in the third quarter following a successful launch in the US in 2008. Building on the firm’s acquisition of broker Miletus Trading, Liquidnet’s program trading desk complements the manual negotiation model of its block trading service by offering executable flow.
According to Barker, Liquidnet is now regularly achieving 70% crossing rates for US program trading clients.