Accessing liquidity was a central theme of TradeTech 2008, both on the podium and in the exhibition hall. But there is a marked difference between what is said in public – in a panel discussion or presentation – and the whispered exchanges taking place among delegates and on the conference stands. In particular, the ability of brokers to provide connectivity to new sources of liquidity and their willingness to share access to their own liquidity are both open to debate.
“We have plenty of support from banks such as Merrill Lynch, Morgan Stanley, Credit Suisse and Citi, but some other firms are really just paying lip service at the moment, because they haven’t got their internal processes sorted out yet,” said Peter Randall, CEO, Chi-X Europe, the multilateral trading facility.
And the differences in banks’ abilities to provide clients with full access to new liquidity sources across Europe’s increasingly fragmented equity market extend beyond connectivity. “Not all banks are supplying venue-specific execution reports that show clients the price improvement they can achieve,” says Randall. “I don’t know how some banks can look clients in the eye and say they’re delivering best execution.”
Both Chi-X and NYFIX’s Euro Millennium, the broker-independent dark pool launched last month, are open to sharing liquidity with other providers. But they are finding a range of attitudes and capabilities both among brokers and technology vendors.
“I think there’s a clear public/private divide in how brokers talk about sharing liquidity,” says Chris Smith, head of business development, NYFIX Euro Millennium. “In public, they’re keen to promote the depth and quality of their own dark pools, but in private they realise the value of enabling clients to access as much liquidity as possible. Everyone understands that Europe is changing and that dealing with just one broker isn’t viable when there are now multiple choices, not just of venue but of strategy.”
Chi-X’s Randall confirmed that the MTF is in “detailed discussions” on liquidity-sharing arrangements with two dark pools, but declined to say whether they were bank-owned or independent.
NYFIX’s Smith said discussions at TradeTech confirmed that buy-side firms are increasing the pressure on both vendors and brokers to facilitate connectivity to multiple venues. “A lot of firms still want to know when their OMS and EMS providers are going to embed functionality to allow them to connect,” said Smith.
From a vendor perspective, the picture is a varied one, agrees Randall of Chi-X. While Bloomberg, for example, is actively looking to replicate in Europe its ability to route orders to 20+ dark pools in the US, “some of the largest vendors in the market still don’t have properly-functioning smart routing,” according to Randall. “Very often their system architecture is only capable of receiving market data from one source,” he adds. Chi-X has taken the matter into its own hands and will now route orders to other execution venues – for a nominal fee – if Chi-X is unable to meet best execution requirements.
A wide range of buy-side firms have also been using TradeTech to find out about the practical details of connecting to new liquidity pools for themselves, says NYFIX’s Smith. “Large hedge funds are asking about using FIX to connect directly, but those that use third-party algos want to know how they can ensure that their brokers access Euro Millennium,” he says.
Many potential users that have heard from brokers about the benefits of price improvement and greater market depth potentially available from new liquidity have used the conference to allay worries over the nature of the flows within new liquidity sources. “There are concerns: can I be gamed? Is the flow toxic?” says Smith. “But with Euro Millennium they do have the tools to protect themselves, such as minimum execution sizes, or minimum first fills which mean their orders can’t be found with a ping.”