Search for Liquidity Is An Ever-Changing Conundrum for the Buy Side

.As much as they may wish it were true, there is no one-size-fits-all approach to liquidity issues across different asset classes for the buy side. However, with a proliferation of trading venues, algos and utilities across assets, the buy side does have a number of options at their disposal.

Speaking as part of a panel at this year's Buy-Side Technology European Summit in London on liquidity issues facing the buy-side, Antonello Russo, risk manager at BlackRock, highlighted that understanding where liquidity comes from and how to deal with it is of vital importance.

"BlackRock is a very technology-focused company and we place a lot of importance on researching and understanding data in order to manage the trading floor in the best possible way," Russo said. "Something I have noticed is that my estimates of liquidity can be considered objective; they are a function of the way we manage the floor. "

Hand in Hand

While the growth of regulation as both a driver of business decisions and functions has undoubtedly hit hardest in the middle office, it has also made its mark on the search for liquidity.

"Vendors such as MarketAxess are coming in with all-to-all exchanges, where dealers and asset managers are able to get together and transact in a way that creates many more opportunities to buy or sell a particular bond."

As Neil Bond, head trader at London-based Ardevora Asset Management, pointed out, the two now go hand-in-hand as the "unintended consequences" of MiFID, such as market fragmentation, mean that buy-side firms are now finding it harder to source liquidity. The arrival of MiFID II in January 2018 may only exacerbate that situation and it's likely that "hidden liquidity" or dark pools will be next in line.

The controversial double volume caps that will be introduced as part of MiFID II will certainly play a part in the search for liquidity as regulators attempt to shine at least a thin ray of light into dark pool trading. Hidden liquidity and closing auctions make up one-third of the UK's daily volumes according to Bond, meaning technology is essential in order to combat the market fragmentation.

Spoilt for Choice

Solutions providers are of course very aware of this and the proliferation of trading venues, both lit and dark, has rocketed in recent years, particularly in the fixed income and foreign exchange markets. It's not just the sheer number of venues out there that's changing how firms seek out liquidity according to Manish Nager, head of risk, investment management Europe at Vanguard.

"Vendors such as MarketAxess are coming in with all-to-all exchanges, where dealers and asset managers are able to get together and transact in a way that creates many more opportunities to buy or sell a particular bond," he explained.

Nagar asserted that while electronic trading platforms have undoubtedly eased the search for liquidity, particularly in the face of quantitative easing measures brought in since 2008, it is these all-to-all type platforms that hold the greatest value for firms within the fixed income space.

Used alongside more traditional request-for-quote (RFQ) models, all-to-all platforms can provide greater efficiency when seeking out corporate bond liquidity, especially for larger firms like Vanguard that trade in volumes in the billions.

The corporate bond sector is also seeing a rise in utility-type models such as Neptune and Plato Partnership, as examined in Waters earlier this year, which aim to facilitate greater access to liquidity instead of another venue to trade.

While Plato's progress has stalled since last year, the sentiment still appears to be relatively positive, although Bond pointed to similarities between the consortium and London Stock Exchange's Turquoise platform (also chosen to build the Plato platform) which means that it may not be feasible for both to run independently and simultaneously.

Equitization

Compared to other assets, fixed-income possesses "certain peculiarities," according to Russia, that need to be taken into consideration, such as trading market caps, which can be more objective than in equities.

While foreign exchange has been down a similar route as equities in terms of market electronification, the fixed-income space requires a slightly different approach in terms of sourcing liquidity. Bond states that lessons need to be learned from the fragmentation in the equities market and that as technology platforms develop for corporate bonds there will need to be more uniform issuance.

"The bond market is so heterogeneous that even if you went to fully electronic trading it will not work out," said Manish. "Maybe bonds could go to a more homogeneous structure, which could better enable more electronic trading."