Three weeks after the London Stock Exchange (LSE) launched electronic market making on its International Order Book (IOB), market participants are saying they have not yet seen any increase in liquidity.
Since 2 April and in line with the LSE’s SETS electronic order book, the IOB – which provides trading in foreign securities via depository receipts – has offered an integrated market-making scheme where participants can register to commit to provide a displayed, two-way quote on a security-by-security basis.
“Electronic market making is a good idea to try and expand the market because before, no one was obliged to put bids in,” said Richard McKay, head of Russian equities at Russian broker Uralsib. “But while it’s certainly too soon to tell whether the move has made any difference, I haven’t yet noticed any new liquidity. In the long run, I’m not convinced it will.”
Previously, there was no market making on the IOB. Instead, named order functionality let any IOB trading participant enter a single-sided bid or offer, which displayed the trading participant’s name against a specifically priced and sized order of its choosing.
The LSE is understood to be relatively relaxed with the seemingly slow response to the new initiative and never indicated it was expecting any dramatic boost to liquidity – especially in such a short time frame. In fact, the market has always been popular with brokers and will likely remain so.
“The IOB was already easy to trade around and provides you with opportunities to arbitrage global depository receipts and local securities,” said McKay. “There are attractive opportunities to do things you can’t do on other markets.”
However, McKay said one complaint of many brokers is that below the most traded names, liquidity can often be patchy.
“A few years ago, a lot of stocks came on the board and they are still listed without trading very often. It is only the top names that see a lot of liquidity,” said McKay.
Serge Alexandre, senior sales executive, global electronic trading services at Russian broker Otkritie, said his firm was reviewing becoming a market maker but had not yet taken the plunge.
“We’re not aware of anyone who has done it yet,” said Alexandre.
While billed as a move bringing the IOB in line with the LSE’s main order book, the merger between Russian stock exchanges RTS and MICEX threatens to draw institutional liquidity back to the Russian market, and the LSE is keen to retain its share of liquidity in Russian stocks – by far the biggest nationality on the IOB.
“Many institutions presently find it difficult to trade directly in Russia, but that will change,” said Alexandre. “With improvements eventually coming from the financial reforms and the merger, I would expect international liquidity to shift gradually towards the local market.”
But McKay disagrees the move will have any great effect for some time to come: “The RTS/MICEX merger is no threat to the LSE’s IOB in the short term. They are two different markets which you access for difference reasons. Plus the merger will need time to prove itself, investors are creatures of habit and some large institutions will have red tape to cut through before making any shift.”
The IOB accounts for a significant proportion of the LSE’s business – understood to be some 16% – and is home to five of the bourse’s 20 most heavily traded securities. As well as Russian companies, the IOB is also home to issuers from 46 countries, such as India, South Korea and Kazakhstan.