Seth Merrin, founder and CEO of Liquidnet, explains how he has leveraged opportunities over the past ten years and more, and how he encourages a strong culture of innovation and philanthropy
Seth Merrin, president, chief executive officer and director, is an entrepreneur, global business leader and philanthropist who has won several awards for his innovation and influence in the financial services industry. He founded Liquidnet in 1999 and prior to that was co-founder of VIE Systems Inchis, a financial services application integration software company. The first company he established was Merrin Financial, in 1985, launching the industry’s first order management, compliance and electronic order routing systems for asset managers which was acquired by ADP in 1996. Prior to 1985, Merrin was a risk arbitrage trader for CIBC Oppenheimer.
Can you provide a bit of background about how you started in the industry and how things have changed?
My first company was Merrin Financial and the aim was to change the role of the trader, who at the time behaved more like a clerk. They had more of an administrative role for execution because trading was a manual process which used paper tickets which were then entered into back office systems. We invented the order management system (OMS) in 1987, which enabled portfolio managers to input their buy and sell orders directly into a computer programme which then connected to their traders. Today, the OMS is now adopted by just about every investment manager around the world and it opened the door for electronic trading globally.
We started Liquidnet in 2000 and at the time the only way institutions could trade a block was via a human being, but the internet was beginning to change the business model. Retail brokers such as E-Trade and Charles Schwab were enabling retail traders with information and technology that put them on par with professional traders. Meanwhile, institutional traders were still picking up the phone. I believe that one reason they were reluctant to change is because once you introduce technology it reduces the mystique of Wall Street. However, it was an inefficient way to trade so we decided to link all these institutions together and launch a buyside-only platform for anonymous block trading which meant they did not have to go through the sellside to access liquidity. We have since grown our member network broadly to 46 equity markets.
You had a particular culture that you fostered, has that changed since the financial crisis?
The biggest issue of building any company is finding the right people and developing the right culture and that has not changed. In addition to having to be smart, they have to be able to fit into the culture of our organisation. We are very particular about who we hire. Our attrition is less than 5% a year which is a very low turnover rate and our offer acceptance rate is 92%. When we started out we had titles but we eliminated them because we wanted everyone to have a voice. When companies have titles, people often aspire to the next title. Rather than aspiring to having the next title, we wanted them to aspire to having greater responsibility. We continue to be strong believers in continuous learning and development and to that end launched Liquidnet University – which partners with New York University’s Stern School of Business to offer courses and training.
There has been the so-called tsunami of regulation after the financial crisis. How has that impacted your business?
It has been a significant change. Dodd-Frank in the US and Basel III constrained the capital usage of banks which in turn changed the entire market structure of fixed income markets which had been entirely facilitated by dealer capital. Most of the money they had made was in fixed income but the market structure for trading bonds disappeared. This created an enormous opportunity for us to create a centralised order book for corporate bonds in the US and Europe which are two of the largest markets.
The other trend that we are seeing is a move from active to passive investing and questions are being raised as to the value of an active manager. As a result, there is a need for active managers to change their processes and look for alpha in different segments of the market over the short as well as long term. Technology can help them do that in a much more efficient manner.
And to that point, can you explain more about your new Virtual High Touch service?
Under MiFID II, as well as other worldwide regulations, clients have told us that they spend 50% of their time searching for liquidity while the other 50% of that time is spent on administrative and compliance-related matters. Our mission is to leverage technology to better source liquidity and streamline as much of the compliance and administrative work as possible and to provide intelligence to help generate alpha. Virtual High Touch (VHT) is the next stage of the trading technology evolution and is an integrated solution that intelligently sources liquidity via either algorithms or by keeping orders within Liquidnet’s own pool. It also gives traders the right tools and technology like Targeted Invitations which allows traders to source liquidity much more efficiently. Orders are not sent out to the entire trading universe, as technology can help them find where the invitation should go and do it automatically.
The past ten years has seen the emergence of artificial intelligence and machine learning. What are you doing to deploy the technology?
We want to upscale the responsibility of the trader and give them the capabilities and trader intelligence tools to add alpha to the portfolio manager and the firm. We acquired OTAS in 2017 to leverage their AI and big data analytics platform. We recently launched Liquidnet Discovery™, which automatically alerts members when there are events that might influence the liquidity or direction of that order. By integrating it with VHT, it also provides the liquidity sourcing and execution tools that are best suited to take advantage of that information, with an audit trail of decisions made. This gives traders actionable insight on all orders synced with Liquidnet directly without disrupting the workflow.
Philanthropy is an important part of your culture. How has the ethos changed over the past ten years?
Liquidnet’s philosophy is to take on big, difficult problems that most people have avoided in the industry and the same is true for our philanthropy. We do not believe in simply getting out our cheque books but rather in leveraging our best assets for good. Through Liquidnet for Good, we support promising models in education, energy, and food security. Our signature project is the Agahozo Shalom Youth Village (ASYV) in Rwanda. Through healing, education, and love, the ASYV empowers orphaned and vulnerable Rwandan youth to build lives of dignity and contribute to a better world. Through our Liquidnet for Good Fund, we provided seed capital to Ignite Power, a Pan-African developer and financier of safe, clean energy solutions for rural communities.
Finally, we recently launched a so-called “blended finance” pilot programme in Ethiopia to provide low-interest loans to smallholder farmers. We offer a package of drip irrigation, fertilisation, and new types of super seeds combined with expert training to help improve the farmers’ yields and livelihoods. Each of these efforts serves as a demonstration of the effect of mobilizing private capital for public good.