Published May 18, 2023 | 6 min read
Key Points
- Liquidity contraction is extremely challenging for the buy-side. The buy-side must therefore be open to innovation, new ideas and not sit still.
- Growth in internalisation is adding to inaccessible liquidity.
- Integrating data with workflows and interoperability are key priorities for the buy-side.
- The complex regulatory environment in the EU & UK is an additional challenge.
TradeTech returned to Paris 17-19 April 2023 and was well attended this year with market participants coming together to discuss some of the key challenges faced by the industry, amid a sense of frustration that growth in European markets is stagnant compared to the US and Asia and concerns about institutional liquidity.
“The buy-side trading desk needs to work harder to get into the market. There are more interesting venues in Europe than the US and a lot of effort can be done to increase the turnover in Europe,” stated Emil Framnes, Global Head of Equity Trading, Norges Bank Investment Management.
It was pointed out during panels that a trend towards bilateral relationships with market makers and increased internalisation is adding to inaccessible liquidity. The lack of transparency in reporting of certain crossing activity was another theme - is there a balance between crossing internally and liquidity seeking on the central limit order book participants asked themselves?
“The makeup of the liquidity landscape and the types of players has changed over time, meaning there is not much pure discretionary activity in the market,” remarked Rupert Fennelly, EU Head of Equities Electronic Trading & Sales, Barclays.
“From a low-touch perspective, it is about looking at all sources of liquidity on an ongoing basis and achieving the best outcome by finding new ways to access that liquidity and keeping on top of that.”
Rupert Fennelly, EU Head of Equities Electronic Trading & Sales, Barclays.
Jeremy Smart, Global Head of Distribution, XTX Markets noted that there is a strong move towards fragmentation in terms of venues and the way liquidity is provided and the protocols to access it. “When providing liquidity through our SI to brokers we get quite different outcomes and that affects the quality of liquidity we provide to those brokers. We do not provide the same liquidity to all brokers and that’s a challenge,” he said.
The liquidity that is available is not really quality liquidity, stated James Baugh, Head of European Market Structure, TD Cowen. “We have talked about bilateral relationships with market makers and I put that in the bucket of inaccessible liquidity. It is not additive to all. We know engaging bilaterally with market makers can produce different outcomes and we have to consider that.”
Another topic of discussions is how the close is becoming increasingly volatile as more of that business is executed outside of the primary auction. The buy-side also expressed a sense of frustration with the recent explosion of new products promising to solve their problems – including challenges with engaging at the close.
“New offerings in the last few years have somewhat exploded,” stressed Emil Framnes, Global Head of Equity Trading, Norges Bank Investment Management.
“We on the buy-side are a bit fatigued with the new products and the promise of what they can do for us.”
Emil Framnes, Global Head of Equity Trading, Norges Bank Investment Management.
Finally on the technology side, data and interoperability were buzzwords this year and there was a debate about whether traders should learn to code.
“Bringing that data into workflow decision making and interoperability are the priorities. That is driving how we think about new products and product development,” Ravi Shrivastava, Head of Product for Global Markets Group, S&P Global Market Intelligence said.
“The interoperability is a massive bonus on the desk and anything we can automate we have done so, meaning traders can focus on the more difficult decisions and trades,” thinks Alex Hunter, Head of Liquidity and Algorithmic Trading, JP Morgan Asset Management. “The key is the ability to speak a common language and get those ideas across to each other.”
Hayley McDowell
EU Equity Sales Trader & Market Structure Consultant