Buy-side firms are increasingly facing pressures to move to new market making and liquidity providing roles, however most are sceptical of the added capital requirements this will bring.
Speaking to The TRADE Derivatives Supurna VedBrat, head of global trading at BlackRock, the world’s largest asset manager, believes the buy-side can take on an alternative role in disclosing prices as opposed to making markets.
“You are seeing some of the proprietary trading firms becoming more active market makers. I can see the buy-side taking a more active role as a price maker,” she said.
“A price maker is different from a market maker – as a price maker you are willing to declare the price at which you will buy or sell a security. Being a price maker can be beneficial if there is a market event or for liquidity constraint products.”
With a number of banks pulling back from their traditional market making services, there is pressure from new firms to fill the void.
According to a poll of 300 global asset owners and asset managers, conducted by State Street in October last year, 42% agreed the role of hedge funds as providers of liquidity will most likely grow.
VedBrat has not ruled out using new entrants as market makers, in which the global asset manager “will look at all forms of liquidity.”
“If the proprietary trading firms provide liquidity in markets under certain conditions and it is beneficial to our clients, we will explore using it, especially in products or markets where there are liquidity constraints,” she added.
Liquidity is at the top of VedBrat’s concerns going forward, however she believes asset managers and their sell-side partners can work together in certain areas to improve the trading infrastructure and bring back players to the market.
“In certain markets that are liquidity constrained, the buy-side and sell-side should work together to create pools of liquidity and all-to-all trading capabilities. There are certain areas where we can collectively improve, such as the options trading infrastructure,” she said.
“You now see, on a voluntary basis, the adoption of swaptions and single name CDS trading as cleared products, which is a positive outcome.”
For the full interview with BlackRock’s Supurna VedBrat, look out for the Q2 issue of The TRADE Derivatives.