Buy Side Aims To Go Back To The Future To Find Liquidity

Terry Flanagan

In a period of persistently low volumes and an increasingly fragmented playing field, buy-side institutions in Europe are finding it harder to get their large orders filled satisfactorily.

Senior buy-side institutional traders also face the growing prospect of trying to disguise these orders in the face of the more predatory high-frequency trading strategies, as HFT now accounts for around 40% of all European trading volumes.

Long-only investment strategies are generally at odds with the more speculative nano-second profit-driven approach favored by high-frequency firms.

Some buy-side market participants, though, are looking at ways of being able to avoid this HFT flow, which has blossomed since the take-up of electronic trading in the last decade or so, and are longing for a return to the good old days where a traditional broker would sift through which type of flow you wanted to interact with.

“The desire to avoid predatory HFT activity has meant that firms want to know exactly who they are dealing with and the likely outcome of showing their hand at any given venue,” said Steve Grob, director of group strategy at Fidessa in London, a trading and technology company, in his latest blog.

Discretion is the name of the game for many institutions as they don’t want to see the market move against their comparatively big orders.

“I sit on the fence on HFT,” Paul Squires, head of trading at Axa Investment Managers in London, a French-headquartered buy-side institutional investor, told Markets Media.

“Only because it all represents liquidity, albeit different quality liquidity. If I can get the same liquidity from an institution on the other side or its HFT then, of course, I will choose to interact with the institutional flow every time. But it is not quite as simple as that.

“There is no point the institutions trying to pretend we can govern market structure if HFT is now 40% of European volumes and institutional flow is only around 16%.”

Of course, there are specialized block trading brokers, such as Liquidnet, around that say they do not allow HFT into its facilities and primarily help the buy side execute large orders.

But new outfits are beginning to spring up in the marketplace allowing firms to execute block trades anonymously using social-networking technology.

One of these is MarketBourse, which aims to launch in the U.S. and Europe some time next year and is the brainchild of former Chi-X Europe founder and chief executive Tony Mackay, and will allow the buy side, sell side and interdealer brokers to form their own private circle of friends, similar to Facebook, where traders can then share trading information so that the information is contained only within that group, thus minimizing information leakage.

“It might finally prove how social media and financial markets are supposed to work together,” said Grob at Fidessa. “Market pioneers are starting to make this connection—such as Tony Mackay with MarketBourse—but you wonder if an exchange is even needed at all.

“Historically, exchanges provided a physical meeting place for interested parties to engage in price discovery, but increasingly these same parties can now find each other in cyberspace. So maybe the return to high touch trading is achieved by overlaying social media concepts on top of the low touch networks that now proliferate the industry.”

Another social-networking based platform set to launch in the first quarter of next year is the London-based Squawker platform, which says it will allow sell-side firms to execute block trades anonymously but will be “neither a traditional trading exchange, nor dark pool, nor a multilateral trading facility”. It promises to help sell-side firms find liquidity, negotiate and trade large blocks of shares without causing ‘information leakage’ and prevent exposure to predatory high-frequency trading firms who would thus move the market against such orders.

Squawker is looking to target the 10%-15% of pan-European equity trading still negotiated over the telephone, but aims to cut away the middleman by allowing firms to trade securely and anonymously in an electronic social-networking sphere.

“However all this pans out, the current difficulty in finding suitable liquidity means that a return to more relationship-based trading looks a distinct possibility,” said Grob. “The use of social media in this way could provide a high touch service but without the high cost.”

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