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Joanna Nader, group head of strategy, TP ICAP

As rumours persisted that trading network and venue operator Liquidnet was up for sale, it came as no surprise when interdealer broker TP ICAP confirmed plans to acquire the company for $700 million in September. With the acquisition having been completed in March, TP ICAP now has its hands full as the integration of the platform begins steadfast. 

Liquidnet presents a significant opportunity for TP ICAP. Much like Liquidnet, the broker also operates multiple trading venues around the world but with a focus on commodities and interest rate derivatives.

The deal opens a door for TP ICAP to expand into equities with Liquidnet’s origins in client-to-client dark block trading, but it also provides buy-side connectivity in the credit market which, if married effectively with TP ICAP’s dealer relationships and liquidity, could prove disruptive for incumbent platforms MarketAxess, Tradeweb and Bloomberg.

Group head of strategy, Joanna Nader, tells The TRADE that TP ICAP’s strategy for its agency execution business has been to diversify its client base on the buy-side after focusing primarily on the hedge fund community. Liquidnet’s network of more than 1,000 buy-side clients, who collectively manage $33 trillion of assets in equities and fixed income, was a key driver in TP ICAP’s decision to acquire the platform.

“When we first started looking at Liquidnet, it was clear that they had already done a lot of the hard work in terms of onboarding major global asset managers for credit, and getting the required OMS/EMS connectivity, which addresses the major barrier to entry – a connected network of participants,” Nader says.

“Building that level of connectivity organically would have taken us many years, and we would have risked missing out on some of the market opportunities that we are so excited about. We now want to use our close relationships with the dealers to provide further liquidity sources to that ecosystem and give users have a wider range of transaction options.”

Over 500 buy-side clients access Liquidnet’s fixed income liquidity pool for client-to-client trading. It is one of the largest pools of buy-side corporate bond liquidity, boasting average trade sizes that are between five and 10 times higher than other platforms and buy-side daily liquidity of around $13 billion. Liquidnet’s blotter sync technology, which provides a unique level of insight into the order lifecycle and trader blotters, is also a key differentiator.

Although Liquidnet has managed to cement itself in the more competitive dark space for equities, TP ICAP has the chance to burst into the credit market, which has typically been dominated by three incumbent platforms. Major platforms like Tradeweb and MarketAxess have been quick to cater for evolving execution trends, developing new tools for portfolio trading, for example, which is now a major part of the market.

While Liquidnet is yet to unveil a portfolio trading solution and demand from the buy-side for more ‘full-service’ brokers continues to increase, TP ICAP has the chance to capture a percentage of business by developing new tools and protocols through Liquidnet.  

The credit market is more fragmented and complex than equities given there is no exchange traded reference price. Regulatory interventions such as the Volcker Rule has also forced dealers to wind down the balance sheets that they were willing to put to work in the credit market, sparking more electronic trading and the rise of the buy-side price maker.

“The electronic market will continue to evolve and grow. I think buy-side-to-buy-side trading will grow over time, but we have to remember that the bank business model is different from asset management. The regulatory influences and constraints are also different. So, the drivers of buy-side and sell-side trader behaviour are not the same. We want to offer Liquidnet members and banks a range of trading protocols, and to make each trading protocol as effective for participants as we can,” Nader says.

“We have a number of ways in mind to expand and enhance Liquidnet’s credit offering, which we will be discussing with our buy- and sell-side client base over the coming months, but I think it is important to note that we want to help users to transact, not to take a view on how the market structure should evolve. Market structure is something market participants should decide, rather than market operators.”

Feedback from clients on the Liquidnet deal has been very positive, but there’s reportedly concern from the buy-side that opening the door to dealer liquidity could in some sense corrupt the market that Liquidnet has established. Describing TP ICAP as a venue operator, Nader continues that TP ICAP doesn’t take risk and doesn’t want to jeopardise any relationships.   

“Trust is incredibly important in all of the dealer-to-dealer, dealer-to-client, and client-to-client, and all-to-all market segments. We do not want to jeopardise the trust that Liquidnet’s clients have in the ecosystem,” she says. “Buy-side traders may be surprised to know that dealers are just as sensitive.

“From my perspective, it is about understanding the needs and sensitivities of all market participants, and about being transparent. It’s about transparency, knowing how a particular protocol works, who’s in that market segment with you, and being clear on the rules.”

Rob Laible, head of equities at Liquidnet, also tells The TRADE that client feedback on the acquisition has been positive. He adds that with TP ICAP’s support Liquidnet is in a stronger position to develop innovative equities solutions for the buy-side in this era of data-driven investing, while continuing to partner with the sell-side to aggregate liquidity and deepen the equity pool.

“The short answer is nothing has changed. Liquidnet is an unconflicted agency broker known for its culture of innovative collaboration with the buy-side,” Laible says. “TP ICAP understands the importance of the trust placed in Liquidnet and intends to build on our market-leading brand. That’s certainly an exciting prospect for our members.”

Liquidnet is not TP ICAP’s first acquisition aimed at increasing its engagement with the buy-side. In 2018, the company acquired agency broker Coex Partners, which provides execution services to hedge funds, asset managers and other clients in listed derivatives and OTC FX.

Coex co-founder, John Ruskin, came to TP ICAP after the deal closed as CEO of agency execution and is working on the integration of Liquidnet. Ruskin highlights the importance of Liquidnet’s brand and immense client support for the platform, but he emphasises there is lots of room for growth, particularly in terms of distribution.

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John Ruskin, CEO, agency execution, TP ICAP

“Liquidnet is a very trusted brand and the clients are so supportive,” Ruskin tells The TRADE. “TP ICAP’s acquisition of Coex validated what we do with the buy-side and it has become increasingly clear that the marketplace very much values an agency offering. Liquidnet builds on and accelerates our buy-side strategy. It has brought us top calibre people, sophisticated technology, an impressive client base and very substantial connectivity – in both equities and credit.”

TP ICAP has already confirmed it will spend up to £30 million on Liquidnet in the next two years, with a focus on building out dealer-to-client rates trading capabilities. The spend is in addition to continued investment in Liquidnet’s equities platform and there are also plans to expand the team with an array of new hires across the business lines.

After reducing front-office headcount by roughly 20% in recent years, Liquidnet has operated with a relatively small team based in London and New York that worked across several key roles such as trade negotiation and sales. TP ICAP will add talent to Liquidnet, starting with the credit business and across Central Europe in major hubs including Paris, Frankfurt and Copenhagen, as it focuses on building out distribution.  

“We have always told our shareholders that Liquidnet isn’t a cost savings deal, it’s a growth deal. What is incredibly motivating is that as we have gone deeper post-close, it has become clear there is so much more from a functionality and platform perspective that we can do beyond what we initially thought, which has been an upside surprise for us,” Ruskin adds.

“Liquidnet has been doing what they do for a long time now and doing it very well. For the next stage, I think for us it’s about helping the equities platform get accepted as a fuller service market participant, rather than solely a dark and block specialist. We want to build on Liquidnet’s dark execution strength, but there’s a lot more than the platform can do for its clients.”

In recent years, Liquidnet has expanded its data and technology capabilities through several of its own acquisitions. Its purchases included FinTech companies like OTAS Technologies, which provides buy-side intelligence and analytics with artificial intelligence and big data, as well as machine learning trade and investment analytics provider Prattle. Liquidnet launched a new data business in early 2020, which combined the firm’s various data focussed takeovers under a single brand, known as Liquidnet Investment Analytics.

Having recently rebranded its own data and analytics business as Parameta Solutions, TP ICAP will accelerate growth in the new data division’s client base. It will also sell its data to Liquidnet’s fixed income clients and boost the data offering with Liquidnet’s data science team, artificial intelligence technology and natural language generation tools.

One of the more recent developments from Liquidnet prior to the acquisition by TP ICAP was plans to launch a new platform for the primary market to automate and streamline new issue workflows. Although it was tipped to launch by the end of 2020, the platform is still in the early stages of development, but according to Ruskin and Nader, it remains a focus for TP ICAP.

“We are very excited about Liquidnet’s forthcoming offering for the primary market. We are planning to launch a tool to automate and facilitate the new issuance workflow,” Nader explains. “The great thing about this project is that the buy- and sell-side came to Liquidnet and said they wanted to make the issuance process more efficient. New issues involve a very manual, but critical process. From our perspective we are pleased that key market participants both trusted and wanted to work with Liquidnet.”

Under new ownership and following the departure of founder and renowned CEO, Seth Merrin, who joined an AI-driven portfolio construction FinTech company in March, the acquisition marks a new chapter for Liquidnet and an exciting opportunity for TP ICAP to shake-up the institutional fixed income trading landscape.

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