Ask not what your broker/dealer can do for you; ask what you can do for market liquidity

Today's Report On Business magazine (an insert in the Canadian national newspaper The Globe and Mail), has a glossy plug for Markets Inc. the Canadian answer to stateside block-crossing-networks.

The piece starts with the all-too-familiar fable about how a manager for one of Canada's largest pension funds accidentally witnesses one of his supposedly anonymous blocks being shouted about on the trading floor of a broker dealer. A prelude to the solace and justification for why his fund became a key backer of Markets Inc.

That argument aside, the fact that the article incorrectly bundles crossing networks with traditional ECNs as one and the same with thrown in nationalistic references to home grown versus imported technology and...., you get the picture.

I do have a problem with block-crossing networks in general but in the case of Markets Inc. in particular, I believe that this is a company that appears to have been conceived and designed from the ground up for the sole purpose of becoming a buyout target. It brings zero real innovation but lots of inner-circle pedigree to the table. Positions itself as a thorn is someone's side (The TSX, traditional broker-dealers, U.S. crossing networks) and deftly slips onto the scene ahead of Canadian subsidiaries of established U.S. entrants (Liquidnet and Harborside+). Markets Inc., will work the regulatory hurdles, sign up some choice buy-side names, grab a pittance of liquidity, ensure it becomes the Canadian poster child of alternative networks and wait. Wait for the offers to come in.

Zero innovation, limited contribution to the dynamics of Canadian capital markets and one more of the closed-garden-variety clubby networks to contend with.

Capital markets especially in Canada, desperately need more liquidity injected into the system not three new single-purpose electronic players competing for the upstairs market!! To their defense, traditional broker dealers take those same block orders and for the most part throw big chunks of them back into the liquidity pool. Electronic crossing networks do not. In the U.S., no matter how big, companies like Liquidnet become, their impact on the liquidity pool will always remain tolerable, in Canada a similar impact will be profound.

Buy-side firms and large fund managers should realize that in capital markets as it is in waste management, recycling is their only hope for longevity!