As markets fluctuate and regulation changes the course of liquidity, experts at FILS t emphasised the importance of relationship depth over counterparty type when navigating liquidity strategy in fixed income.
At the stem of this, experts emphasised the importance of understanding the ultimate objective looking to be gained from a liquidity provider from a buy-side perspective, which also aligns with understanding the differences between bank and non-bank providers.
This was underlined by one panellist, who said: “I worry that we’re at risk of over generalising bank versus non-bank. There are vast differences within banks and also within non-banks. That distinction of one versus the other is less important than understanding what you’re trying to go achieve as a buy-side firm.
“What are the things that really matter to you? Having a good diverse set of liquidity providers using data and analytics and then giving them feedback and moderating the pool as you go. Non-banks are investing in relationship building, banks are investing in technology. This is a landscape that’s changing a lot.”
Additionally, the discussions turned introspectively towards ensuring the buy-side understands their own needs, and to then communicate these to a diverse pool of liquidity providers and refining that selection to optimise liquidity outcomes.
Ultimately, this approach was emphasised by panellists as essential to balance diversification with meaningful engagement, to avoid being insignificant to providers.
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However, the importance of relationship management remains at the forefront of conversations, and has been consistently highlighted as a critical priority for buy-side traders.
Specifically, traders appear to value counterparties who pick up the phone during volatile times over electronic channels. As one expert commented: “You want to be able to have someone that picks up the phone, will work through an issue with you, so that you know when times get tough and liquidity is not there that they’re going to go and provide that.
“Make sure you’re not diversifying so much that you’re barely using anybody and become insignificant in that in that area, whether it’s liquidity provider venue or something else.”
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Experts were also quick to assure that they would be open to new entrants to the liquidity provision market to challenge traditional bank dominance, with emphasis on the quality of liquidity, rather than quantity.
“The bigger point to make is that the market needs quality liquidity rather than just a flood of pricing because it’s all about scoring and ranking and trying to provide highly curated and natural liquidity and surface it. The industry really needs it.”