IEX Group Inc., a trading venue fighting against purported abuses in the U.S. stock market, has a new ally: Liquidnet Holdings Inc.
Stock traders on Liquidnet can now tap an algorithm that shops their requests to buy and sell shares on both the Liquidnet and IEX platforms. Liquidnet caters to big investors seeking to place big trades -- the sort of customer IEX was designed to protect against allegedly predatory practices.
“I think our DNA is similar,” Rob Laible, global head of Liquidnet’s execution and quantitative services, said in a phone interview. “It’s a natural fit. IEX did a lot of good work in uncovering some of the games being played and they’ve been good about explaining their business model.”
IEX gained prominence after the company and its founder, Brad Katsuyama, were cast as the protagonists in Michael Lewis’s “Flash Boys,” a book that portrayed the U.S. market as rigged against everyday investors. The company says it prevents the fastest traders from taking advantage of its customers. Liquidnet, a venue for trading large-sized orders averaging 42,000 shares each, doesn’t allow high-frequency trading firms - - another moniker for the fastest firms -- in its markets.
“Liquidnet and IEX are designed to protect our clients from toxic strategies that extract value without returning anything back to the marketplace,” IEX Chief Strategy Officer Ronan Ryan said in an e-mail. “So from a philosophical level the partnership makes sense.”
IEX and Liquidnet together handled 1.3 percent of trading volume in the U.S. stock market last month, with IEX accounting for more than four-fifths of that, according to data compiled by Bloomberg. After an order sits on Liquidnet’s platform for five seconds, the new Liquidnet IEX Dark algorithm then routes any unexecuted portion to IEX.
Sang Lee, co-founder of research firm Aite Group, said the algorithm could be beneficial for “a user-base that share a common mindset” with Liquidnet and IEX. But he added that Liquidnet IEX Dark is not a panacea and will have to compete with scores of other algorithms.
“I don’t know if you would look at this as one algo to resolve all the problems that may exist in the marketplace. I think that’s definitely overshooting it,” he said. “This is not one algo to rule them all.”