Asset managers must diversify trading counterparties to deliver best outcome, finds new report

Asset managers that use independent market makers as direct liquidity partners report lower execution costs and fewer issues accessing continuous liquidity during periods of intense volatility, finds data from Acuiti.  

A new survey of European asset managers has found that 71% of those that use independent market makers (IMMs) as direct liquidity partners started to do so in the last three years, coinciding with the rise in market stress. However, only a third of the Bloc’s top asset managers currently engage with IMMs directly, suggesting significant room for growth.  

Yet as rising market stress drives some of the traditional liquidity providers to partially withdraw from certain segments of the market, the need for Europe-based asset managers to expand and diversify their liquidity partners’ pipeline becomes increasingly relevant. And with those using IMMs reporting lower execution costs and fewer issues accessing continuous liquidity during times of volatility, it would seem that having a mix of trading counterparties operating different business models improves pricing in aggregate and ultimately ensures better trading outcomes.   

The findings are published in a study entitled ‘Turbulent Times: How volatility is changing asset managers’ approach to execution’. Commissioned by global quantitative trading firm Susquehanna, it provides insights into asset managers’ changing perceptions of their trading counterparties, ease of access to liquidity, particularly during stressed market conditions, and what requirements they need to meet to ensure efficient portfolio trading activity. 

The study suggests that a divergence in approach to trade execution is emerging across Europe. Over a third (35%) of asset managers are now looking to make changes by increasing or diversifying their trading counterparties, with the biggest driver (cited by 73%) being a desire to execute against firms that specialise in a specific product or market.  

For those looking to increase or change their counterparties, internal compliance is the biggest barrier; along with misconceptions around regulatory requirements and fears over information leakage.   

“Heightened volatility, the need to reduce costs, the need for liquidity in specialist sectors and constraints on liquidity provision by banks have led the buy side to seek liquidity from other sources, particularly from independent liquidity providers,” said John Keogh, managing director at Susquehanna International Securities. “Although the survey shows that compliance burdens may be an obstacle to adding liquidity providers, this concern may be overstated as the growth in RFQ based platforms that admit as members both buy-side and market makers directly has greatly decreased the administrative effort to access liquidity directly from market makers “