Liquidnet’s Merrin Discusses Launch of New Trader Analytics Tool

Back in May 2017, Liquidnet announced that it was buying analytics firm OTAS Technologies, a vendor that had made its name in the field of artificial intelligence. A year later, after an extensive beta period, the dark-pool provider has gone live with its first integration of OTAS’s tech—a trader-intelligence tool called Discovery.

At its core, Liquidnet hopes that the offering—which is an addition to its Virtual High Touch (VHT) platform—will allow sales traders at buy-side shops to have better conversations with portfolio managers in order to improve their ability to generate short-term alpha, says Seth Merrin, CEO of Liquidnet, which runs an institutional equities marketplace.

“VHT, up until Discovery, has really focused on developing the execution ecosystem. The part of this with Discovery is about creating real trader intelligence,” he says. “Traders have told us forever that the most value-add that they can provide to their firms is to be more integrated into the investment decision-making process. Well, Discovery takes the massive amount of information that’s out there and puts just what’s relevant in front of the traders—customized for whatever they are trading at the time—and makes sense out of it.”

Discovery is an extension of the analytics engine developed at OTAS over the last seven years and incorporates artificial intelligence and machine learning to siphon through the vast amount of market data out there, to find and deliver actionable insights to traders. It fits into the VHT offering, which is used for sourcing liquidity, crossing, and development of trading algorithms. Using AI, it is meant to augment what a trader can do by automatically piecing together market information for a specific product, and directing the trader’s attention to what’s most relevant to them.

“It’s what the best sales traders used to do, and now using technology we make it incredibly consistent and relevant to just what they’re trading,” Merrin says. “It gives them the information that they need at the time that they need it.”

• [Listen: After the OTAS acquisition was announced, Adam Sussman, head of market structure for Liquidnet, joined the Waters Wavelength Podcast to talk about the merger. Click here to listen.]

Discovery is first being made available on Liquidnet’s equity platform. It has been launched in the US and in the EMEA—Europe, the Middle East and Africa—region, and is currently being piloted inside of seven firms in Asia-Pacific (APAC), Merrin says. Because the machine-learning algorithms need time to take in and understand a market’s microstructure, down to the individual security level, and because APAC is so fragmented, “it will take a bit longer for the technology to learn each one” of those various market’s microstructures.

By using AI, Discovery’s aim is to sift through a sea of information to find anomalies—even potential cases of insider trading that could have an effect on a stock price. As an example of how it works, Merrin points to something that came up in the beta phase. One of Liquidnet’s members was buying a stock for a company that was reporting its earnings in a few days, Merrin recalls. Discovery saw that short interest was spiking, as many in the market had a bearish view of that earnings call.

“Our member was buying it, we said, ‘Look, short interest is spiking, if earnings are not as terrible as people are thinking they’re going to be, then we think that there’s going to be a short squeeze and the stock price will spike up.’ With that, the trader went back to the portfolio manager, told him this info, the portfolio manager sped up the buying, and earnings were not as terrible as expected, and the stock price spiked up,” he says. “That piece of information allowed them to add a good amount of alpha into the portfolio.”

About 90 firms are enabled to use the new platform, which is about 10 percent of the company’s members. While Liquidnet can, essentially, flip a switch and eligible members will have access to Discovery, Merrin says that the tool “requires a certain amount of training.”

“This is a real shift in changing their roles and responsibilities,” he says. “It’s not just about hitting an algo or negotiating a match; this is about really understanding the intelligence and how to apply it and what kind of conversations they can have with the portfolio managers. This is a whole other source of training that we have to provide to the traders, so it’s not for everybody.”

In other Liquidnet news, last week WatersTechonlogy reported that the company has registered Market Identifier Codes (MICs) based in Ireland for multilateral trading facilities (MTFs) covering equities and fixed income in preparation for the UK’s departure from the European Union (EU).