Dark pool trader Liquidnet pledges more AI use to boost portfolio performance

‘We’ve evolved from being a simple dark pool operator into a global fintech player,’ says Seth Merrin, Liquidnet’s CEO and founder, boosted by its recent acquisition of Otas Technologies

PUBLISHED : Thursday, 30 November, 2017, 7:46am
UPDATED : Thursday, 30 November, 2017, 7:46am

Officials at Liquidnet say the US-based institutional “dark pool” trading operator has pledged to make even greater use of artificial intelligence in future, to provide more analytical information and increase the use of computer power to improve client portfolio performance.

Dark pools are a type of alternative stock trading system that gives investors the opportunity to place mainly large orders and trades without publicly announcing their intentions.

Liquidnet directly connects large-scale investors. It claims to have created an improved global institutional marketplace for those seeking higher investment, better performance, and capital-raising opportunities on a bigger scale.

This new generation of stock-trading venues are used mostly by institutional investors for “block trades” involving large number of securities, and have caused considerable debate among the industry over their ability to price stocks more flexibly than exchanges.

The rapid adoption of such technology by Liquidnet, and other start-up networks, has already allowed successful and extensive expansion of online investment platforms, so-called robo-advisers, and various wealth management operations, while the overall performance of traditional active managers has declined.

Seth Merrin, Liquidnet’s CEO and founder, told the South China Morning Post in an interview on Wednesday: “We’ve evolved from being a simple dark pool operator into a global fintech player.”

According to S&P Dow Jones Indices, over the past five years 74 per cent of global active funds had underperformed the S&P Topix 150 benchmark in Japan, 55 per cent had underperformed the S&P BSE 100 in India, and 88 per cent had underperformed the S&P 500 in the US,

More trading of large blocks of shares has migrated off stock exchanges to dark pools in recent times as a result, as institutional investors move towards empowering technology for more accurate forecasting and market monitoring.

New York-headquartered Liquidnet bought Otas Technologies in May – a market-leading analytics platform that delivers actionable market intelligence and context directly to institutional traders and portfolio managers — with the aim of providing its institutional clients and portfolio managers with improved machine learning and big-data analysis.

In the US and Europe, key Otas functions are delivered through Liquidnet’s desktop platform to source liquidity, for instance, measure the potential impact of trades, monitor marketing conditions, and support best execution strategies.

Lee Porter, the firm’s head of Asia-Pacific, added the new offerings which integrate trading orders with related information and applications, are expected to be available from the company in Asian markets including Hong Kong, Australia, and Japan next year.

While Rob Laible, Liquidnet’s global head of equity strategy, said: “Our goal with this acquisition is to bring Otas’s analytics into the Liquidnet platform and deliver market context directly to the trader at the point of execution.”

Our goal with this acquisition is to bring Otas’s analytics into the Liquidnet platform and deliver market context directly to the trader at the point of execution
Rob Laible, Liquidnet’s global head of equity strategy

Dark-pool trades conducted by Liquidnet’s platforms currently average US$1.1 million in value and substantial trading volumes are being seen both in Asia and globally, as institutional asset managers shift their preferences.

In Asia-Pacific, US$34 billion was traded this year across 13 markets in the region with the largest trade at US$289 million.

Both Hong Kong’s securities watchdog and insurance regulator have introduced measures to encourage more brokerages and insurance companies to promote the use of fintech to clients as part of a wider Hong Kong government effort to prepare the city to compete with overseas rival such as Singapore.

In September, Secretary for Financial Services and the Treasury Chan Ka-keung said both the Securities and Futures Commission and the Office of Commissioner of Insurance had introduced regulatory measures similar to the regulatory “sandbox” introduced by the Hong Kong Monetary Authority earlier this month.

Regulatory sandboxes are effectively “safe, supervised spaces” in which new businesses can pilot innovative finance products, services, business models and delivery mechanisms without immediately incurring any regulatory consequences.

Last month, Liu Mingkang, a former chairman of China’s banking regulator, urged the setting up of a similar dedicated sandbox for the ever-growing Greater Bay Area – the Pearl River Delta region linking 11 cities in southern Guangdong province, including Hong Kong and Macau.