Three months after a New York judge ruled on their five-year patent dispute, ITG and Liquidnet have decided to withdraw from further legal action and reach a compromise on the use of the ”blotter scraping' technology deployed in both firms' crossing networks.
The two firms, which offer agency brokerage services as well as off-exchange matching facilities to the buy-side, have dismissed all claims in their respective lawsuits against each other and have decided to cross licence the relevant patents.
On 21 December 2011, the New York Southern District Court ruled that ITG had not infringed Liquidnet's patent on its blotter-scraping technology. In expectation of an appeal, ITG, which runs the POSIT dark pool, informed US buy-side clients it would no longer provide connectivity to Liquidnet's buy-side only block crossing network from its execution and order management systems. The disconnection programme has now been cancelled and buy-side firms are once again able to connect to Liquidnet via ITG's Triton andMacgregor XIP products. The two firms have also entered into a commercial agreement to allow users of Triton and Macgregor XIP to access Liquidnet. The commercial agreement between the firms will stand until August 2014. Other details of the settlement and the commercial agreement between the two parties were not disclosed.
The patent under dispute was for a system that allows the integration of an electronic securities marketplace with order management systems, allowing “institutional investment management firms to connect with an electronic marketplace and trade securities (or other financial instruments) with one another”. In practice, the technology allows a trading venue or crossing network to automatically trawl through a member trader's order list and alert him to a possible match with a similar order on the blotter of another member.
“This was a sensible result,” said a source at a rival venue. “If the case had continued, the patents could have been re-examined for their validity.
There was always a risk that the patents could have been ruled invalid during the dispute.
This result mitigates that risk and works for them both.”
The agreement resolves a series of legal disputes that began in 2006 when Liquidnet alleged patent infringement against ITG through its Channel ITG and the Macgregor XIP products in a Delaware court. Channel ITG is the technology used by ITG to link Triton and Macgregor XIP to its POSIT crossing network.
ITG countersued in 2007, after which Liquidnet dropped its original claim and filed an answer, affirmative defence and counterclaim in a New York court. It also filed a similar claim against US broker Pulse Trading, which operates the BlockCross dark alternative trading system, on 21 July 2007.
The following year ITG filed an amended complaint alleging fraud committed by Liquidnet against the US Patent and Trademark Office on grounds that the firm had not revealed that it derived its patent from work done in 1997-1998 by third parties. It also claimed that Liquidnet was interfering with its business prospects through “tortious interference”, although this was dropped in July 2010.
On 21 December 2010, Judge Shira Scheindlin at the New York Southern District Court granted motions from ITG and Pulse Trading for summary judgment of no literal infringement and denied Liquidnet’s motions. The judge also granted ITG’s motion for summary judgment on Liquidnet’s willful infringement claim and denied Liquidnet’s motion for summary judgment on ITG’s inequitable conduct claim.
The joint decision to end the dispute is seen as a reflection of the fact that the technology, though valuable to the buy-side trader, is no longer a significant competitive differentiator.
“As far as technology is concerned the game has now moved on,” said one source. “It's not about blotter sweeping, it's more about algo strategies.”