What are the key pain points associated with accessing liquidity and how do you navigate this?
Since the introduction of Mifid I and II and the subsequent rise of MTFs and other alternative trading venues, we’ve seen a huge drift towards market fragmentation. Do additional venues really mean we have more choice? Do end-clients benefit from the shifts we’ve seen in an attempt to realise a more competitive market structure? Or has it just spread liquidity more thinly over a more convoluted playing field? This is already a well-covered, but increasingly significant topic in this industry. There are many providers out there who are offering a vast array of interesting and innovative solutions to try and navigate this landscape, but for me, rather than build a patchwork of different systems, the key to steer through such a fragmented market is to try and keep things clean and simple.
Firstly, getting your broker and trade strategy right from the outset. By this, I mean you need to make sure that the liquidity seeking tools available to you are far reaching enough and leave no stones unturned when scanning all liquidity options, including lit and dark venues across the market you’re trading in to achieve the best possible result for the client. Good market data is always key to helping with this, both as a pre-trade analysis tool, as well as managing post-trade transaction cost analysis. It helps in identifying where your strategies are benefiting the investor and by finding the more obscure corners of the market, where liquidity might hide away.
I noted in a recent edition of The TRADE that a group of European exchanges have agreed to work together to develop an application for an enhanced consolidated tape providing greater historic data to support trade execution. This has been widely discussed for equities and that would certainly be a step in the right direction.
Which market structure and regulatory changes are you most conscious of?
Although it might seem like the blink of an eye, it’s actually been a long time since Brexit and the UK is finally – albeit very slowly – starting to talk about divergence, for better or worse, with its own regulatory deviations. There’s a couple of potential and current changes that I’m keeping an eye on. First and foremost, is the Consumer Duty. It’s described as one of the biggest regulatory changes in 15 years. I do think it’s wise for all market participants dealing with direct clients, such as myself, to make themselves aware and work out exactly what it means for them and the way that they operate.
Secondly, slightly further on the horizon, something I’m also interested in is the potential to extend or even remove the volume cap on dark venue trading. It’s been argued that allowing more volume to trade in the dark is harmful to natural price formation, as volume is taken away from lit venues that are often used as reference benchmarking points. However, dark trading allows asset managers to unwind large trading positions in a single trading session without negatively impacting the price nor does it present the risk of information leakage. Is the UK prepared to be a guinea pig in this field? It would certainly be an interesting topic to keep an eye on.
Additionally, one of the ideas that seems to have gone a bit quieter recently, in the wake of so much else, is the shortening of trading days in the UK, to bring us in line with many of the other bourses across Europe and concentrating liquidity into a shorter aligned trading session. I remember a few years back, the idea certainly had a few proponents, but whether this re-emerges will remain to be seen.
How have relationships between the buy- and sell-side shifted over the last few years?
As more and more volume – even in traditionally more illiquid names – has shifted to lower touch trading, industry relationships have naturally moved in terms of the core factors that are important. Where one’s relationships were almost solely built on dependability and trust, these have now expanded much more towards available technology, efficiency, and statistical analysis. Rather than a counterparty to either directly face or use as an agent to trade, the sell-side are now seen – to a greater extent – as builders and providers of technology and trading solutions. Although the industry is still heavily relationship driven, counterparty conversation will now almost always consist of an explanation of the algo suite on offer, how it’s different to that of the competitors, how their flagship algos vary and how they can get ahead of the competition.
These of course, will therefore need to be carefully measured overtime, as will evolved methods of TCA tools. As the technology progresses, it will become easier to understand which brokers and algos are working and which aren’t performing as well as a competitor. Even more so, when the use of an algo wheel is employed, various trading strategies may be directly compared to those of competitors and levels of each one be automatically calibrated based on trading success. What this means is, it’s not just the relationship that’s important anymore, it’s now very statistical based. Much, much more results driven – which is right for the end client.