The Two Sides of the Liquidnet / NYSE Euronext Trade


New York, NY – A few weeks ago Liquidnet, the New York-based global electronic trading network, announced that it had partnered with NYSE Euronext to launch an innovative new service to link corporate issuers and institutional investors.  The new system, dubbed InfraRed, is part of LiquidNet’s new “corporate access” service slated to be released in July to help corporate management better target the right institutional investors to focus their investor relations efforts on and to help buy-side PMs and analysts get access to the corporate management teams they want to speak with.
The Skinny on the Service

InfraRed is a desktop application that presents institutional demand, news sentiment, and block trading data in a proprietary manner.  This data is “sanitized” so it doesn’t reveal how specific investors are trading.  The data is provided as an aggregated ratio of the total number of buy orders in the Liquidnet system to the number of sell orders in the system (with the ratio capped at 5 to 1 or 1 to 5).  This helps ensure that the issuer doesn’t know how much of that security a firm is looking to purchase nor the name of the firm that is interested in that stock.  This information is presented as an average of the BUY / SELL order data collected over the past 24 hours, and the average ratio is lagged by 2 hours.  This application will be provided to NYSE’s issuers free of charge through NYSE’s ‘NYSEnet’ system

However, the InfraRed application is only half the service.  The second part of this service is a “two-sided” management access product.  Liquidnet expects that once CFOs and IROs (Investor Relations Officers) use the desktop application discussed above, they will naturally turn to the NYSE and Liquidnet to help them set up meetings with institutional investors that are actively investing in their stock.  In addition, Liquidnet expects that portfolio managers and analysts working at buy-side member firms are also likely to use the service to proactively request meetings with corporate executives.

Management Rationale

According to the LiquidNet’s Press Release, CEO, Seth Merrin explains that the rationale behind the launch of the new InfraRed service is to use technology to make one important part of the capital markets more efficient.  “The corporate access business, in its current state, is highly inefficient and a perfect example of how legacy practices often fail to serve the needs of issuers and investors alike. We set out to change that and we have created a new and innovative model that seamlessly connects issuers and investors. We believe that this new model will mitigate the inherent conflicts that often arise in servicing both the portfolio managers at our Member firms and NYSE Euronext’s corporate issuers. The launch of this new business expands the benefits of the Liquidnet community which now includes portfolio managers, analysts and issuers,” concluded Merrin.

The NYSE Euronext sees the partnership with LiquidNet as a way to help their issuers better understand the investor community interested in their shares and make their IR efforts more productive.  In the past, the kind of data provided in the InfraRed service was not readily available to issuers.  NYSE Euronext management feels this product is a logical part of the growing array of “issuer services” the exchange is trying to offer.
Initial Market Feedback

Not surprisingly, some competitors were unsupportive of InfraRed, explaining that they would never sell their clients’ execution data, as this is contrary to the anonymity that most clients are looking for when they trade via a “dark pool”.  As mentioned previously, Liquidnet is not planning to sell this data to corporate issuers. 

As you might expect, not all buy-side investors are excited about the InfraRed service either.  Some investors feel they are being well served by the investment banking community or by their own internal initiatives.  Other buy-side investors expressed grave concerns about the kind of insight into their strategies that corporate issuers would be getting with the new service.

However, Integrity spoke with management at a few buy-side firms who had studied InfraRed, and they were not terribly concerned about potential information leakage associated with the service.  These executives explained that the information provided by Liquidnet had been massaged enough by aggregating the order data, turning it into a capped Buy / Sell Ratio (with no price or volume associated with it), averaging it over 24 hours, and lagging it by 2 hours that a corporate executive wouldn’t be able to derive any real trading value from it.

In fact, the investors we spoke with were excited about the ability of their portfolio managers and analysts to use InfraRed to request access to the corporate management teams they are particularly interested in. They felt that InfraRed could help them get access to the management teams they wanted to speak with when they wanted to speak with them, rather than relying on an investment bank’s non-deal road show calendar.  Of course, middle-tier investors also felt that InfraRed could help them get access to management teams if they were “shut out” of a bulge bracket firm’s road show.

Corporate IROs and CFOs of uncovered and under covered companies were most interested in InfraRed given that it is the first service to provide insight specifically into institutional investor interest in their shares.  In addition, IROs felt that the fact that this service is based on actual order data, and it is extremely timely, enables them to target their corporate communications activities to investors who are currently active in their shares.

The Proposed Business Model

Other than market acceptance of the new service, the big question about InfraRed is how is Liquidnet is planning to commercialize this effort.  As we mentioned earlier, Liquidnet is planning to give the desktop application away to corporate issuers with the hope that this will lead them to ask Liquidnet to help them set up meetings with active institutional investors in their shares.  In addition, Liquidnet will take requests from institutional investors to set up meetings with corporate executives.

Ultimately, Liquidnet is planning to charge investors a specific fee for any meetings that they attend, regardless of whether the Liquidnet set up the meetings for a specific issuer, or if the investors requested the meeting.  The rationale behind this is that given InfraRed’s targeted model, investors will only attend meetings they value and they are willing to pay for.

Executives at Liquidnet explained that investors would pay anywhere from $5,000 to $20,000 for a management meeting depending on the specifics of the company, turnaround time, and other factors.  These fees can be paid using CSAs or CCAs, with traditional soft dollars, or with a hard dollar check.

Integrity’s Assessment

The more that Integrity learned about the InfraRed service, the more interested we became.  It is obvious to us that Liquidnet has developed and will market the InfraRed management access service to both issuers and buy-side investors in an effort to “move up the value chain”.  Today, Liquidnet is a “dark pool” provider that gets paid solely for execution services.  However, in the future, Liquidnet is planning to use InfraRed to justify getting paid for additional value added content.  As we have written about on our blog in the past, one of the “research” services that institutional investors value most is management access.

What makes the InfraRed service so interesting is that Liquidnet put together a number of factors that we think increases the likelihood of success.  Some of these include:

1.      Innovative Information Service:  Based on over one year of development, and the input from more than 50 buy-side firms and 50 Investor Relations Officers, Liquidnet was able to design an information service that walked the tightrope of providing sufficient information for it to be valuable to issuers, while not enough information for it to be harmful to their buy-side clients.  While this service provides value in and of itself, it is really an advertisement for issuers to call Liquidnet to help them set up management meetings with active investors (and as a reason for Liquidnet to call IROs to discuss a more proactive communications strategy).

2.      Deep Knowledge of Which Institutions are Buying / Selling an Issuers Shares:  The real valuable information Liquidnet possesses is an intimate knowledge of which institutional investors currently have BUY and SELL orders in an issuer’s stock.  It is also important that close to 85% of Liquidnet’s more than 500 members are long only investors, as opposed to active traders, or short oriented hedge funds.  It is this information that Liquidnet can leverage to help set up meetings for issuers to meet with investors who have a proven interest in their stock.

3.      Partnership with NYSE / Euronext:  Most corporate executives have little knowledge of Liquidnet.  Consequently, few IROs would be likely to respond to Liquidnet if they were attempting to roll out this service on their own.  However, the partnership with the NYSE Euronext, in concert with the desktop application, should help Liquidnet get the attention of corporate management teams.

4.      High Quality Team of Management Access Professionals:  Besides the development of their innovative desktop application, Liquidnet has also hired a seasoned team of well respected professionals who have experience building successful management access businesses for top tier investment banks.  These professionals should be able to help gain the attention of, and provide critical customer support, to both issuers and buy-side investors.

5.      Transparent Pricing Model:  The last part of the service we think is important is a transparent pricing model.  Liquidnet believes that by making it clear what investors will have to pay to meet with the management of companies they are currently investing in, it will be able to grow its commission revenue as a result of setting up these meetings.  Certainly, this is important so clients don’t try to “bundle” these meetings in with the execution-based commissions they are already paying Liquidnet.

The big question mark for us is, “Will investors accept paying a discreet fee for management meetings?”  It is clear that investors value management access, however we are just not sure they are willing to pay incrementally for this service.  And while we think Liquidnet has pulled together the right pieces to produce a compelling management access service, we will have to wait and see if they can convince investors to “pay up” for something other brokers have always offered as a part of the bundled service.


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