How ‘dark pool’ operator Liquidnet is using AI to help traders make better decisions

Liquidnet, the largest “dark pool” operator in the Asia-Pacific region, has introduced artificial intelligence and machine learning tools as customers increasingly turn to new technologies to manage their portfolios, according to its founder and chief executive Seth Merrin.

Dark pools are electronic trading platforms that have emerged in the past decade in advanced markets. They allow traders to buy or sell large blocks of shares without having to disclose their identities, the volumes or prices, unlike traditional exchanges.

They are popular with asset-management companies, pension funds and insurance firms which need to conduct a lot of large transactions, because they are cheaper and easier to carry out via electronic trading platforms.

Merrin founded Liquidnet in 2001 in the US and later expanded into Europe and Asia-Pacific. The platform has seen trading volume in Asia-Pacific of US$42 billion so far this year, up 57 per cent from a year earlier. Hong Kong and Japan, its two largest markets in the region, have both doubled their volume of trade year to date.

In the US and Europe the figure is US$608 billion, up 23 per cent from 2017.

“The rising turnover shows institutional investors are more and more in favour of using electronic platforms to trade. It is also because we have introduced a new digital analysis tool for the customers, which adds turnover to our platform,” Merrin said in an interview on a recent visit to his Hong Kong office in Wan Chai.

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Called Discovery, the new analysis tool is installed on the computers of fund managers.

It uses artificial intelligence and machine learning to analyse massive amounts of data and past trading records to give automatic alerts if a sudden market event occurs that may affect the portfolio. These might include an interest rate rise or political events.

“Discovery is not a robo-adviser but it uses AI and machine learning technology to analyse market information for the fund managers. The fund managers are the ones to make the investment decision but Discovery can help them to make a better decision,” Merrin said.

The new tool can also help investors to find the stocks they want to trade by searching within Liquidnet’s 46 markets worldwide as well as external traditional stock exchanges and other electronic trading platforms.

Turnover, or principal traded, in the US and Europe year to date, totalled US$608 billion, up to 23 per cent year on year.

Merrin said the new tools were launched in the second quarter of this year in the US and Europe, and turnover on Liquidnet has increased as a result.

In Asia-Pacific, it has introduced a pilot allowing 10 per cent of its clients to use the tools during the summer. A full-scale launch is scheduled for the end of this year.

Lee Porter, the Asia-Pacific head of Liquidnet, said the volatile markets this year have created more trading opportunities. This has led Hong Kong trading via Liquidnet to rise to US$12 billion, double the amount in the same period a year earlier.

“The US-China trade war may lead to volatile markets. Our customers are mainly institutional investors who are investing for the long term,” he said.