As display market tumult rolls on, the future still looks bright for dark pools. Last week, Liquidnet Holdings—one of the most successful block trading electronic networks for large-scale institutional inventors buying and selling outside traditional exchanges—filed with the SEC for a potential $500 million initial public offering.
No share price range or number of shares to be sold were disclosed. The public offering will come from the shares owned by major stakeholders, senior management and the board of directors, will include Class A and non-voting Class B stock. Goldman Sachs and Credit Suisse are lead underwriters of the transaction, joined by JPMorgan Chase, Lehman Bros., Sandler O’Neill and Liquidnet Inc. itself.
Liquidnet, founded in 1999, has built up a membership community of 514 investment firms on its platform, which it estimates accounts for nearly $16 trillion in equity assets under management that have an average trade size of 51,580 shares. That activity has brought healthy revenue for Liquidnet—it reports that grew 2007 revenues to $346 million, up from $253 million the year prior; and had first quarter 2008 revenue of $108 million with $26 million in earnings.
Dark pool firms like Liquidnet—including the BNY ConvergEx Cross service, POSIT, Pipeline and the BIDS network owned by major sell-side brokerages—have been growing quickly as alternative trading vehicles for investors whose bulk purchases would have too great an impact on share prices if they put their bids out on the public markets.
Dark pools and alternative network trading forums such as ECNs could account for nearly 40 percent of trading volume by 2011, predicts Aite Group. And while growth can be good, there are potential problems for dark pools of liquidity if they take over more of the market. In a research report issued last year by Aite, it noted that as more shares traded off-exchange, there’s less transparency of for true-market reference prices that open markets bear out.
