LEADER OF THE PACK.

Seth Merrin, founder and CEO of Liquidnet explains how the company maintains its cutting edge.

Q. What impact is the current environment having on the trading environment?

A. The uncertainty over the global macroeconomic picture combined with the eurozone debt crisis is making markets swing up and down by 3% to 5% in a day, making it difficult for institutional investors. The retail investor has also been frightened away. If you look at 2008, Henry Paulson who was Treasury Secretary introduced the Emergency Economic Stabilization Act which led to the ($700bn) Troubled Asset Relief Programme. I think Merkel and Sarkozy should introduce a similar type of programme to stabilise the situation.

Q. I see that Liquidnet continues to report strong volume in this volatile time. What are the reasons behind this?

A. Despite the high volatility and increased uncertainty around the future of the eurozone, Liquidnet continues to be the destination of choice for institutional investors to access block liquidity around the globe away from the retail markets safely and efficiently.

Liquidnet saw a 23% month over month increase in overall US trading volume while year-to-date through October volume rose 7% from 2010. We also dominated block trading. On average, when Liquidnet traded a stock, it represented 34% of the day’s market block volume in that stock. In addition, 58% of all US stocks traded through Liquidnet were either the first or second largest print of the day in that security.

Were you surprised by the survey you recently undertook showing that more than two-thirds of your clients were concerned about how high frequency trading was affecting their investing styles?

We are not at all surprised that the number one concern of our members around the world is high frequency trading. And the past few months of market volatility have only underscored concerns of large fund managers about high frequency trading and the need for a deeper separation from institutional trading. High frequency trading is a fairly recent phenomenon in the US, is more recent in Europe and is still nascent in Asia. We found that markets, particularly in advanced economies, are increasingly becoming polarised between high speed traders who are valuation agnostic and investors who are focused on fundamentals. The heightened volatility in global equity markets since August led mutual funds in general to quickly sell assets while high-frequency traders constantly hunted down the information leakage involved with such orders to take advantage of market imbalances.

Q. Do you think there HFT should be regulated?

A. I am not in favour of regulation to solve the problems posed by high frequency traders. I don’t think that is the solution as they are not doing anything immoral or illegal. The problem affects sophisticated investors and it is incumbent upon them to protect their orders.

Q. What are your views about the overall regulatory climate that the industry is facing?

A. There is definitely a regulation frenzy taking place around the world. We work very closely with regulators around the world and it is good to see that they do have an understanding that institutions manage money on behalf of pension funds and mutual funds and that not all dark pools are created equal. However, what our members are impressing upon us is that they as institutions have different needs than retail investors and that should be taken into consideration. For example, take the proposals in the MiFID review about transparency. Institutional investors believe they would be adversely affected if they had to display their intent in, say, buying 10,000 shares of a particular stock.

Q. Despite the competition Liquidnet has consistently won awards as the best buyside execution venue. What are the reasons behind your staying power?

A. The awards prove that not all execution venues are equal and that not all liquidity is safe for institutions to access. The awards are also further recognition of the safety, efficiency and price improvement that our institutional marketplace provides globally. While other venues seek to attract more high frequency trading and other competing interests to their venues, Liquidnet continues to focus on building and strengthening our trusted institutional community of like-minded investors who can best execute their large orders. The average size of our negotiated executions is more than 100 times that found on an exchange and the price improvement is 100%.

Overall, we follow a few simple rules such as listening to our customers, understanding their problems and then developing solutions that address their concerns. We hold a summit in the US and Europe every year as well as several events where we get together with our customers and exchange ideas.

Q. Can you explain in a bit more detail about Six Swiss Exchange Liquidnet Service and any future partnerships?

A. Earlier this year we partnered with SIX Swiss Exchange to offer its buyside customers the option of interacting with sellside block liquidity from the exchange’s members. (The link which matches trades at the mid-point price of the primary exchange will cover approximately 3,000 equities in the Swiss, UK, French, German and Dutch markets. The deal ranks as the first time an exchange and a trading venue that operates dark pools joined forces).

We are in discussions with at least a dozen of exchanges around the world. Every exchange needs a global strategy today and partnering with us gives them access to our deep liquidity. Our goal is to bring as much liquidity as possible to our members. We have spent the past ten years building our global platform and operations in each financial centre and today we are in 39 countries. Over the years we have seen an increasing openness around the world to trade on alternative trading venues. The US was the slowest to adapt to our platform because we were new but Europe has been much faster. The quickest though was Australia followed by Hong Kong in Asia Pacific but the rest of the region is still wed to the exchanges and VWAP-type models. However, I think we will see adoption rates accelerate as the region’s investment focus becomes more global.