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Korea, Japan and Australia. In the United States, the volumes transacted by Liquidnet would rank it in the top 10 of brokers.
The service will cater exclusively for buy-side clients, rather than brokers. The Liquidnet crossing engine integrates into the order management systems of the funds, identifying outstanding trades that are not being worked by brokers.
Dark pools are only as effective as the volumes from of actively-trading funds that use them. Globally, Liquidnet has 420 clients of which two-thirds are long-only and the remaining third are hedge funds.
For Asia, Liquidnet has found 130 client funds that want to trade Asia via its network, constituting sufficient critical mass to keep the crossing engine buzzing. The numbers includes 40 of the top 50 funds trading Asian stocks, the provider says.
In order to sign up, clients need to have $200 million of assets under management and an order management system that can talk to Liquidnet û such as Charles River, McGregor, Longview or Bloomberg.
Observing the crossing engine going through its paces, the system looks remarkably user-friendly. The user inputs the stock name and parameters of the approximate volumes he wants to transact.
It is a quantity tool, not so much a price discovery system. It is intended to allow large-block traders to deal in bulk, rather than breaking up orders into fragments and risk moving the market. Any match identified will trigger a flashing icon on your workstation, and generate a link that puts buyer and seller in touch, at which point they start negotiating price. For example, one might suggest mid-point, bid or offer, then the other party is free to accept, reject or counter.
Any order that is input must be a legitimate and authentic, users cannot troll the dark pool to find out prices and volumes. Additionally, tiny, but genuine trades get filtered out, and the average trade size is $1.5 million. Dreaming up a big fake order in order to flush out any real orders, with the intention of then front running them is strictly against the Liquidnet regulations.
Liquidnet expects approximately half of the identified matches to stimulate negotiations. Less liquid stocks frequently offer better opportunities for trading on Liquidnet, or those stocks with wider bid offer spreads.
ôAny system has the potential to be gamed. We have rules and being in Liquidnet is a bit like a golf club,ö says David Klinger, its managing director in Asia.ö There may be people who are not appropriate members of the community. One in eight get kicked out.ö
In the US, LiquidnetÆs fees are two cents per share and in Europe eight basis points. Liquidnet told AsianInvestor that its estimated costs for trading in Asia will be eight basis points for Japan, 10 basis points for Hong Kong Singapore and Australia and 12 basis points for Korea. It estimates these to be at about half of the level of fees for a fully worked cash deal.
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