One of the problems with dark pools of trading liquidity is the "chicken-and-egg" problem of having to place a live order first just to see if there is liquidity available. Liquidnet has helped its buy-side customers avoid this, by delivering streaming liquidity and algorithmic strategies direct to traders.
After acquiring agency brokerage Miletus Trading in 2007, last year saw Liquidnet ramp up its Supernatural offering, giving customers access to streaming liquidity and algorithmic routing to external markets in addition to its negotiated pool - for a combined total of 7.9 billion shares a day of liquidity for executing institutional-sized order flow.
Liquidnet obtains streaming liquidity from external sources the company calls streaming liquidity partners (SLPs). These liquidity providers allow Liquidnet to intercept their order flow before it is exposed to the public market. These smaller orders are absorbed by the larger Liquidnet Member orders at a mid-point price. An SLP order passes through Liquidnet Supernatural and either immediately executes at the current market data mid-point or leaves the Liquidnet system and moves on to the public trading venues. Auto orders can also execute against other auto-orders in Liquidnet Supernatural.
The company has 21 streaming liquidity partners, including BATS ECN, which signed up just before being granted exchange status in mid 2008.
Through Supernatural, Liquidnet provides as much of the institutional volume in the marketplace as possible and provides traders with multiple opportunities to execute an order against this volume without it ever needing to interact with the public marketplace.
Finextra verdict: Large executions with minimal information leakage are what buy-side traders want, and Liquidnet is continuing to find new ways to make this happen.