Liquidnet aiming to entice more NZ fund managers into 'dark pools'

Liquidnet will open its New Zealand business next Tuesday. Photo / Richard Robinson

A US firm which specialises in "dark pools" trading is hoping to increase the number of international fund managers trading in New Zealand listed securities by bringing its electronic trading service here.

The type of trading is called "dark pools" because it allows investors to trade anonymously with prices only made public once trading is complete.

Liquidnet, which already operates in 36 markets including Australia, will open its New Zealand business next Tuesday allowing institutional investors who trade large blocks of shares to be connected with its 650 global members.

Dark pools trading has attracted criticism for lacking transparency and European regulators are reported to be scrutinising the trading networks to see whether they provide fair pricing to investors and enough data to the market.

A spokeswoman for Liquidnet said the company was not under investigation and the concerns in Europe related to large asset managers which used dark pools to trade both retail and institutional shares.

Liquidnet dealt only with large investors and had strict criteria for those it allowed to become members.

Liquidnet Australia co-head Sam Macqueen said the advantage of the service was that it limited news of the trade getting around the market which could increase or decrease the share price of the security being traded and potentially stop the deal from going ahead.

"When people have a large order now there is a disincentive to tell people about it. Through our service the number of shares for sale is undisplayed so investors are totally protected."

Macqueen said Liquidnet stopped sellers from needing to mask or break-up the blocks of securities and allayed concerns about leaks to the market.

The service also cost about half that of a traditional broker as it was transaction only and did not include other services provided by broking firms like research.

Macqueen said the cost savings could be passed on to retail investors like those invested through KiwiSaver funds.

The company had 650 members globally and 160 in the Asia Pacific region. It only allowed large investors to sign up and to qualify investors needed about US$200 million under management.

"We vet who the members can be and install the technology in their system."

Macqueen said while it only undertook a small percentage of the total trades in Australia its business there was growing and 50 asset managers had signed up to it since the company launched there two and a half years ago.

Liquidnet had yet to sign up any investors in New Zealand.

But Macqueen said it already had demand from its members wanting to trade in New Zealand.

"We are hoping our system will give people more opportunity to invest into New Zealand."

NZX head of markets Fiona Mackenzie said it saw Liquidnet's entry as good news for the local market. "It's positive because it enables a broader range of investors to buy and sell stocks."

She did not consider the company's trading to be an issue because the results would be reported to the New Zealand stock exchange.