The ability to access fragmented liquidity is the key criteria for buy-side traders when selecting trading tools such as execution management systems and algorithms, according to a new survey by the Securities Industry and Financial Markets Association (SIFMA).
SIFMA’s second annual European equities electronic trading survey, which polled 48 buy-side investors and nine sell-side firms between November 2008 and mid-January 2009, found that accessing fragmented liquidity was the only challenge that buy-side respondents ranked higher than four out of five in terms of importance. Other challenges included market structure changes, multi-asset-class trading and post-trade transparency.
Buy-side traders also ranked access to multiple liquidity sources as the most important consideration when choosing both order and execution management systems. For order management systems, access to liquidity shared the top spot with access to multiple brokers.
Liquidity hunting, where priority is given to maximising available liquidity by searching all potential sources, was ranked as the most important method of executing trades by buy-side respondents to the survey, beating dark pool sweeping, aggressive routing and passive routing. The buy-side also deemed access to liquidity as the most important factor for differentiating between providers of execution algorithms, followed by access to multiple execution venues.
The survey also predicted continued growth in the use of electronic trading. More than 70% of sell-side respondents expect to receive in excess of 80% of their trades electronically within three years. Currently, just over half of sell-side firms receive 60% or more of their trades electronically.
Some 60% of respondents expect 80% or more of their flow to be directed electronically in three years’ time. Currently, less than 40% of respondents direct 80% or more of their flow electronically.
SIFMA is a US-based trade association representing the interests of participants in global financial markets. Members include international securities firms, US-registered broker-dealers and asset managers.