Block trading venue operator Liquidnet has closed off disclosure issues identified by the Securities and Exchange Commission (SEC) related to its service which facilitates links between issuers and investors.
In an email to members last week, Liquidnet informed clients that SEC staff had raised concerns over how the firm protected identities of participants, but that the venue operator had since corrected these issues and no longer provided “descriptive characteristics” about member firms.
The SEC was specifically concerned about practices at Liquidnet which meant representatives described counterparties in the pool in a manner that could, the SEC maintained, have potentially lead to identification.
“These were oversights. They were errors of omission, not commission,” Liquidnet chief executive officer Seth Merrin is reported to have said. “Still, they are issues we had to correct and we corrected them.”
The issues pertained to Liquidnet’s InfraRed application, which is a platform through which issuers can gauge “institutional sentiment” as indicated by the participating members of the venue’s institutional community. Liquidnet lets asset managers opt out of having their information included in the InfraRed product, but it seems there were issues with how this opt-out was managed.
Merrin said the SEC inspection “revealed some shortcomings with this business, [but] we do not believe that any member was ever disadvantaged in any trade. Nevertheless, we take these issues very seriously and have taken steps to address them.”
In his communication to customers, Merrin said the venue was not accused of revealing the identities of institutions, but it might not have lived up to its responsibilities, because the descriptive information it provided prospective customers could have been construed as valuable to companies considering buying or selling shares.
The SEC has also inspected Liquidnet’s Equity Capital Markets team, which used the InfraRed tool to bring issuers and institutions together.
Liquidnet is thought to be one of many venue operators which have come under increased scrutiny by the agency this year as concerns grow over the increased take-up of dark pools, and electronic and automated trading practices.