Leading the liquidity charge
Liquidnet have had a busy year expanding its remit and building out services for both the buy- and sell-side. Chris Jackson, global head of equity strategy & head of equities, EMEA, delves into more detail around how it values its relationships, how it develops a unique offering compared to its competition, and the crucial role that algos are playing in sourcing liquidity.
How have you garnered engagement with buy-side firms and counterparties, and how do you differentiate your service in order to build strong relationships?
Liquidnet has a long history of collaboration with our Members to create seamless solutions to trading challenges. We aim to go beyond simply matching sedol codes in a black box, whether that be through providing a coverage model that supports block activity, or enhancing our Equities application and algos to intelligently unlock liquidity that is not immediately available.
We invest in our community. This summer we were pleased to see the return of our Liquidnet Labs events, a forum where our Members help us shape our products and are part of the journey to bring next generation solutions to the market. We’re also excited to welcome a new class for Gateway in the coming months, our professional development programs that enable traders with the skills for the ever evolving trading environment
How would you characterise your offering, relative to the competition?
The Liquidnet Equities offering specifically is centred around four strategic pillars:
- Ensuring unconflicted execution: Our agency model places Members’ interests at the forefront of our operations. Ensuring that our execution services are entirely aligned with their goals. This approach provides maximum transparency, minimises market impact, reduces information leakage and, ultimately, enhances trade execution quality, making Liquidnet a particularly safe environment to execute sensitive orders.
- A global network: By connecting over 1,000 institutional asset managers across 49 markets, we create a powerful network that facilitates unparalleled access to natural liquidity. These opportunities are also reflected in the access to a premium offering we provide to all buy side firms, whether a large institutional player or a boutique asset manager.
- Shaping the future of trading: Our member-led approach to innovation places the power of change directly into the hands of the buy side. This collaborative process ensures that our platform evolves to meet the dynamic needs of the market and our clients.
- Ensuring Member success through premium service and support: Technology is only as powerful as the support behind it. From picking up the phone to help a block get over the line to being our Members’ trading desk to understand their workflow, the service and support we provide is tailored to each Member and their specific needs.
As a firm there is one key differentiator that sets Liquidnet apart. That is our multi-asset offering. In today’s trading environment it is no longer enough to address individual asset class, clients require more in the wake of fee pressure, rising operational costs and volatility which drive consolidation and ultimately traders to do more with less. Technology providers and brokers need to be able to support desk across markets.
How do you maximise execution quality?
There are many facets of execution quality, each Member defines it differently depending on their investment goals and timeline. A momentum investor may want to pay up for liquidity now, A value investor may be happy to wait. We work with our Members to understand their objectives and tailor our liquidity proposition to achieve them.
Execution quality can also encapsulate operational and technological concerns that effect other areas of the trading workflow, from data quality and reporting to settlements and other client-specific needs.
It is in this light that Liquidnet use a combination of technology and an experienced coverage desk to maximise execution quality. Ultimately, it requires a deep understanding of the specific requirements of client order flow, while having the technology toolkit, operational capabilities, and deep network of liquidity to achieve the outcome that best aligns with client objectives.
How are you helping Members source liquidity in today’s challenging environment?
Liquidnet continues to execute on our commitment to aggregate the fragmented European block market for our Member community. Our agency model enables us to take up a special place in the market where Members have unrivalled control at every stage of the liquidity search process, including the types of liquidity that can be accessed and the varying levels of automation.
This allows us to source quality liquidity in even the most challenging conditions, for example, 64% of the largest block trades in the Small and Mid-cap segment in EMEA were executed or originated from Liquidnet*.
What evolving role are algos playing in liquidity strategy?
Algos are a critical piece of the technology toolkit that power execution quality. Given the fragmented nature of European markets, algos streamline how liquidity is sourced from across the range of European dark, hybrid and lit venues.
As the complexity of the European market structure continues to increase, algos will become that much more important to help traders manage that complexity and to deliver operational leverage to increasingly-stretched trading desks.
Liquidnet’s flagship Dark algorithm allows traders to efficiently source liquidity from all leading conditional and dark venues, with the option to interact in lit markets. Together with its embedded risk controls like its price protection model, and key optimisations like its new dynamic minimum fill logic, the algorithm offers a powerful yet efficient tool for liquidity capture.
What trends are you seeing in the dark and block trading space, and how does this compare to lit volumes?
Dark volumes over the past three years have remained consistent at between 9-11% of overall market activity. As liquidity shifts away from the continuous sessions, transacting in block and in size can help mitigate market impact and avoid potential volatility in the lit sessions. The Large in Scale segment of the dark market saw its share increase during the second quarter, peaking in June at 39% of the dark market. Proactive manufacture of liquidity will grow in importance, alongside the technology and tools that help traders not just access, but generate, liquidity in an increasingly challenging market.
If current trends continue and volumes keep shifting to the auction and away from the continuous sessions, the benefits of transacting in the large in scale market could increase further. Continuous lit volumes have been declining, falling to 41% of overall activity in June 2023, down from an average 50-60% throughout 2018-2021, as volume has shifted toward the closing auction at the expense of activity in the continuous lit session.
Looking ahead, what can users and potential users expect to see develop over the next 12-18 months?
Our commitment to innovation and customer-centric solutions remains and we have ambitious plans to enhance our services. We continue to look to bring solutions to the buy-side that enhance and maximise liquidity opportunities. On the equities side we have been exploring ways traders can better execute exceptionally large trades. That’s something we’ve been exploring with our Members this year and will continue to work on in 2024. From a Fixed Income perspective, we continue to innovate with new protocols. In Listed Derivatives, we have introduced an analytics solution and will be unveiling new offerings very soon.
*Source: Bloomberg and Internal Data: July 1, 2022 – June 30, 2023
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