What Does Innovation Mean in Equity Trading?

Innovation. Has it become one of these overused words in the trading industry? And what does it mean in the context of equity trading? At a time when it has become harder for the Canadian buy side to find liquidity, in addition to moving to more multi-asset trading and investing more globally, the need for additional trading tools is more present than ever.

Jay Lee, head of Equities Canada and Latin America at Liquidnet, said: “The needs of the buy-side are changing. It has become essential to understand client workflows and what solutions work for them specifically. In a competitive trading environment, particularly in the current liquidity conditions, off-the-shelf solutions aren’t enough anymore.”

As a firm, Liquidnet has been in the innovation and financial technology business for the past two decades. According to Lee, it is their 20 years of experience combined with an agency model and trust from clients that have allowed Liquidnet to successfully navigate the evolving trading environment alongside its clients and deliver solutions that address their specific needs.

For example, in April 2023 the firm announced the integration of new alerts into its equities trading application for US and Canadian clients to provide improved liquidity-seeking capabilities. They allow traders the opportunity to take advantage of liquidity events created by dark blocks and reengage within the Liquidnet network on missed opportunities to trade.

These alerts include Surge Opportunity which was designed off of the success of Surge Capture, a feature released from Liquidnet’s innovation hub, the Labs. The alert notifies traders of block trades executed in the market allowing them to stay ahead of sudden market moves and capture opportunities that may have otherwise been missed.

Beyond technology

Lee also raises one point, innovation in the Equities trading world is often talked about only in terms of technology.

“In equities it needs to be a combination of technology and service because technology is only as powerful as the support behind it.” Lee added. “From picking up the phone to help a client with a difficult block order to being on their trading desk to understand their workflow, we believe the service and support buy side firms receive need to be tailored.”

Client-led innovation, cites Lee, is the second important factor when it comes to developing relevant offerings.

“We truly believe that the best ideas come from those who understand the challenges first hand and that’s why we place the power of change directly into the hands of our clients,” explained Lee. “This collaborative process ensures that our platform evolves to meet the dynamic needs of the market and our clients.”

The future of innovation in equities trading

He continued that one of the trends among trading desks is that they are increasingly becoming more multi-asset and Liquidnet has a rich history of bringing its knowledge in financial technology to other asset classes. For example, in 2015, Liquidnet introduced the first peer-to-peer dark pool and the blotter sync technology to this asset class.

“We are now developing a matching platform for listed derivatives,” Lee added.

A second trend, according to Lee, is that clients are increasingly becoming global as they look to invest around the world, especially in Canada with some of the largest pension funds. Liquidnet is in 49 countries and Lee believes that one of the markets with very large opportunities is Brazil.

“The Brazilian market is rapidly evolving. Regulations are changing and we have a first mover advantage as we have had a matching platform there for a number of years, and we are well positioned to innovate,” Lee said.

For example, the Brazilian regulator has announced it will allow block trading, like the European markets. Historically an open auction process has been mandated for when investors are trying to execute a large position.

As a result Plato Partnership, the not-for-profit member organization looking to improve equity trading and SL Tools, a regulated fintech providing a securities marketplace and an electronic financial assets hub in Brazil have announced plans to bring block trading capabilities to the country, subject to regulatory approvals.

Andre Duvivier, CEO of SL Tools, said in a statement: “There is no sustainable way to trade around these market conditions yet, and some traders resort to trading in smaller pieces or using broker algos, which take a long time to fill and dislocate prices. A block trading facility will provide a viable way for institutions to trade around these market inefficiencies, with pricing at the midpoint and minimal market leakage or price impact.”

Clients are also focusing on emerging markets where it is even more challenging to find liquidity.

“One of the pieces of the liquidity puzzle that we are trying to solve is to bring regional liquidity on board which will be a real help,” Lee added. “Our goal in 2024 is to continue to innovate around multi asset trading and to push into different markets, especially Brazil and Mexico, to make sure we maintain our first mover advantage and continue to shape the trading industry with our members.”