Update | Dark pool operator Liquidnet gains from EU’s ban on free research for trade executions

Independent dark pool operators such as Liquidnet have benefitted from a European regulation requiring buy-side fund managers to stop receiving free research reports in exchange for trade executions with particular brokers, said the operator’s chief executive Seth Merrin.

Liquidnet, the largest dark pool operator in Asia Pacific, reported a record US$8.99 billion of principal traded in the second quarter, up 27 per cent from last year.

Dark pool operators use electronic systems to match block trades, with no need for customers to disclose their identities, giving them the anonymity that helps institutional investors hide their investment strategy.

New York-based Liquidnet was set up by Merrin in 2001. It has expanded into 12 Asian cities since 2007 with Hong Kong as its regional headquarter. Globally, it trades for 830 asset management companies in 44 markets worldwide. It is the largest dark pool operator in Asia.

Merrin said the company has seen more fund managers execute trades via its platform in the third quarter, partly due to the regulatory change announced in April by the European Commission.

The regulation, called the level 2 of Markets in Financial Instruments Directive (MiFID II), requires global asset management firms -- including those based in the Asia Pacific but with European exposure -- to unbundle their research reports and execution fees from January 2018.

Under the rule, buy-side managers could not get free research reports from brokers or investment banks if they are executing trades through these firms.