Initiatives such as the planned buy-side only block crossing pool mooted by US giant Fidelity Investments earlier this month reflect the desire of asset managers to make good on their fiduciary responsibility to end-investors, according to Kevin McPartland, principal, market structure and technology at research firm Greenwich Associates.
Fidelity Investments is speaking to numerous other asset managers to discuss the possible launch of a new alternative trading system (ATS) tailored to the needs of long-term portfolio managers.
“Fidelity Investments is exploring, with other asset managers, the possibility of establishing another trading venue,” says Stephen Austin, a spokesperson for Fidelity Investments. “We expect it to strengthen fund performance, address today’s market structure and provide higher levels of transparency, liquidity which will benefit our fund shareholders.”
However, it is far too early to discuss the project in detail, he added, declining to provide further details.
The project – dubbed Sakura, Japanese for cherry blossom, in recent press reports – is a separate initiative from the existing CrossStream Block Liquidity Opportunity Cross (BLOX) that has been operated by the asset manager’s Fidelity Capital Markets unit since December 2012.
Launching a new venue tailored to the needs of the long-only portfolio managers is a logical next step for the buy-side, according to McPartland.
“Clients are interested, more than ever, where their block orders are executed. It is no longer a matter of executing block orders, but executing them in a way in which the buy-side does not feel its orders were picked off or that they leaked to much information to the market,” he said.
Asset managers are finding it difficult to source block liquidity in the US cash equities market, with fragmentation of liquidity across venues offsetting a slight uptick in overall trading volumes so far this year. “Our research shows the buy side is making strong use of sales traders and I think this is why the growth of electronic trading has levelled off,” said McPartland.
Despite the approximately 90 ATS platforms currently registered with the US Securities and Exchange Commission (SEC), of which a solid majority serve the cash equities markets, the buy-side is still clamoring for access to liquidity, especially when they are doing their larger trades, says McPartland.
A key problem is that order sizes remain in the low hundreds for the vast majority of ATSs, with a few notable exceptions such as the block crossing specialist Liquidnet or a handful of broker platforms. This means that the buy-side has to rely on brokers’ smart order routers to re-aggregated liquidity. But it can be difficult for the buy-side to ensure brokers are targeting best price in all instances rather than balancing their commitments to clients with minimizing costs by prioritizing rebates available from some venues.
Institutional investors, and the entire US cash equities market, should expect further transparency from ATS venues come November 10, when ATS operators are required to report order and trade information using unique market participant identifiers (MPIDs) to the Financial Industry Regulatory Authority (FINRA). Operators will start submitting reports without MPIDs beginning May 28.
Whether Sakura will bear fruit, it is still too early to say.
“From the little I know, it sounds good on paper,” acknowledges McPartland. “There is still a long way to go for the market to understand what the offering, its advantages and what threat it might be to the incumbent venues.”
Regardless of which asset managers commit to the proposed venue, it is difficult to build up a new liquidity venue from scratch, he adds. “Liquidity begets liquidity. If you are starting from zero, it is a long touch hill to climb until you see consistent liquidity flow.”
Some observers have made comparisons between Fidelity’s planned buy-side-to-buy-side trading venue with BlackRock’s Aladdin Trading System, which the asset manager launched in early 2012 to allow cross trading of bonds by buy-side members before shuttering the platform a year later.
“At a high level, the concept was the same, let’s get the buy-side together to find liquidity without a middleman,” explains McPartland. “However, the liquidity profile of the two markets are very different. This seems like a similar initiative but it is hard to determine its possibility of success without knowing more details about its structure and fees.”