Liquidnet launches exchange-traded derivatives offering to optimise execution

Published on 6 June 2024

As investors are seeking better access to exchange-traded derivatives to express ideas into the market. In order to optimise execution quality, Liquidnet has launched a new offering in the space to deliver a data-enhanced agency model for the buy-side, to iron out liquidity gaps in certain geographies and to support traders moving into the ETD markets.

Darren Smith, head of execution and quantitative services at Liquidnet, explains that as generalist and multi-asset traders engage more in the listed derivatives space, Liquidnet’s pre-trade ETD analytics and metrics on volume, touch liquidity and hidden liquidity as designed to elevate their capabilities from the get go.

Interview Transcript:

Dan Barnes Welcome to Trader TV your insight into institutional trading. I’m Dan Barnes. Investment managers are increasingly using exchange-traded derivatives to express investment ideas into the market. To discuss how they can optimize their derivatives best execution is Liquidnet’s Darren Smith. Darren, welcome to the show.

Darren Smith Thanks very much, Dan.

Dan Barnes To start with, Liquidnet is not historically been known in the exchange-traded derivatives space. Can you tell us about this new offering?

Darren Smith We started the project because we think there’s a real opportunity to bring a Liquidnet approach to the space targeted, particularly at asset managers. We think there’s been a dearth of innovation. We really think there’s an opportunity there for us to do something quite different. Although Liquidnet might not be a name that’s known in the listed derivatives space, we’re part of a much broader group, and that group processes hundreds of millions of listed derivatives contracts every year. So we really do have the scale and operational efficiencies to compete effectively in the space.

Dan Barnes So how can traders optimize their listed derivatives trading activity?

Darren Smith We think the use of data is really important. Its something that Liquidnet is known for and that’s one of the key themes of our projects really at Liquidnet. Providing data at the point of execution in real-time and building that into the trading decision process to improve outcomes we think is really key. The other thing, which I think is really interesting for Liquidnet is an agency-only offering, which removes all conflicts of interest that might potentially arise as firms are trading with bank counterparties.

Dan Barnes Very good. And what’s your expectations for listed derivatives trading activity this year in 2024?

Darren Smith I think there’s three things to say about volumes in general, and one thing to say about kind of the industry more broadly. Generally volatility supports volumes. So we’ve seen volumes relatively healthy this year. There’s some tough coms, given what happened with SVB in spring last year. On the whole, volumes are holding up really well, and I expect that to continue as the Fed gets closer to cutting interest rates.

The second point to make is that the distribution of volume is quite interesting. There’s been a tremendous focus on the very short end of the US. Something like 80% of the software options volume is going through in the front-dated contracts. Now, that’s not necessarily unusual as we approach a time which the fed is considering a policy change. But I would expect that to change as we go past the point at which they’ve cut rates. And I would like to think that the mid-curve options would start to see greater volume, although I have been predicting that for several months and it hasn’t really materialized yet. There’s still hope though.

I think the third point is more to the geographical distribution of volumes. We’re starting to see little pockets, I think, struggling a little bit. And again, that’s kind of understandable when the US is dominating the beta, dominating the market story, particularly in Sonja options, liquidity isn’t always the best and we’re starting to see declining activity in the bond future as well. I’d like to think as the attention shifts away from the US, those pockets where we’ve got some concerns can see liquidity in activity pick back up, but it remains to be seen.

And then the final point to make is just on the industry developments. We’ve seen a huge efficiency drive from asset managers over the last 12 to 18 months or so of the like I’ve not seen since I’ve been involved in financial markets. That’s create some really interesting dynamics where you’re starting to see firms being forced to do more with less, and you’re seeing the rise of the generalist trader, the multi-asset trader, very often trading products that they’re not immediately familiar with.

Dan Barnes How are you as Liquidnet addressing all of that activity and those dynamics?

Darren Smith One of the things we’ve launched so far is a suite of pre-trade analytics in the listed-derivative space. So it’s real time information delivered at the point of execution to the trader. This presents traders with a series of volume and liquidity metrics in one space, which if you are a generalist trader or multi-asset trader or you’ve been trading all morning, for instance, in a product you’re not necessarily familiar with, you can call up the product in our portal and it will immediately tell you all the relevant information on volume and liquidity for that day, and provides you with comparisons as to how that compares with the previous week as well.

So we have a GUI available, which summarizes the information quite neatly in a series of intuitive charts. But we’ve also got an API delivery as well, which allows firms to be able to use the data in their own way. And where we’ve seen interest in that product is for firms that are starting to automate their execution. So clients are setting thresholds above or below which a trade is routed to the desk for manual execution or routed to the market for automated execution. Now, the appropriate threshold for that can differ from day to day, and possibly in fast markets from hour to hour. But by introducing our series of metrics on volume and liquidity, all of a sudden you’ve got a much more sophisticated set of thresholds on which you can determine that automation metric.

Dan Barnes That’s great. That’s really interesting. And which analytics do you think are really standing out in supporting traders?

Darren Smith So we spent a lot of time in the first phase of what we’ve developed. Just looking at touch liquidity. We looked an awful lot at different metrics, but found a very high correlation with those metrics. And we’ve touched liquidity. So we decided to keep it simple, intuitive and just around the touch liquidity information. Increasingly though, our focus is turning towards hidden liquidity.

So as I’m sure most traders are familiar with, if you see the TY contracts, for instance, offered in 250 lots, but you lift it in 500, you know you’re going to get more than those 250 lots. And that extra that you get is hidden liquidity. Now, by its very nature, that is very difficult to measure and quantify. What we’re trying to do at the moment is come up with ways to proxy for. Ways to imply it. And then once we’ve got that, turn it around and put it on the GUI in the API package for clients to consume themselves.

Dan Barnes That’s great. And then how can we expect to see Liquidnet’s offerings and services evolve in the future?

Darren Smith We think there’s a huge opportunity in the calendar rolls. It’s a massive part of the asset managers business, just given the size of the positions that they run. And even if you can make a modest saving on the bid offer spread, that can have a tremendous impact on the end outcome for those asset managers. We think Liquidnet is really well placed to deliver on this, given its history in the equity block-crossing space.

So we’ve developed a tool which facilitates bilateral negotiation of mid-market block crossing interest in the fixed income and equity index calendar roll business. We’ve got a couple of different ways that clients can access this. So they can either access it via the desk, reducing the order to the Liquidnet sales trader. We’re about to launch a facility whereby they’ll be able to access the pool directly from their own trading system.

We spent a lot of time developing it so that it fits into their existing workflows for relatively seamless execution. We think there’s a tremendous opportunity to improve access to mid-market trading in the calendar rolls, but also, more importantly, solve some of the timing and coordination issues that exist during that roll period. We’re really excited by it. The first phase is live already, and we’re about to go live on the second phase. So yeah, we’re very excited.

Dan Barnes That’s great. Darren, thank you so much.

Darren Smith Thank you.

Dan Barnes I’d like to thank Darren for his insights today and of course you for watching. To catch up on our other shows, including Trader TV this week at 6:45 a.m. UK time every Monday morning go to

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(Exchange-traded derivatives, execution, best execution)