Buy Side Airs Liquidity Concerns

Terry Flanagan

Access to global liquidity pools and new sources of liquidity will be crucial to buy-side firms achieving best execution for their investment decisions, according to a survey of 115 buy-side equity traders by Liquidnet. Even as confidence in equity inflows returns, 84% of the survey’s respondents were either ‘concerned’ or ‘very concerned’ about being able to source liquidity in the current market.

“The majority said their biggest challenge in the market is finding liquidity,” Brennan Warble, head of U.S. equities at Liquidnet, told Markets Media. “That obviously plays to our strength because we spend all of our waking hours trying to figure out how to best package liquidity in a safe way so they can access it.”

Liquidnet conducts the survey annually to gauge the concerns of institutional buy-side traders in sourcing liquidity for large trades.

“Our membership provides liquidity to each other daily to create block liquidity. We conduct this survey and ask them to provide their insight to each other as to what they’re worried about, what they’re thinking about and what’s top-of-mind for them,” Warble said.

The survey found that nearly two-thirds of U.S. and EMEA asset managers expect an increase in equity inflows in 2015, with U.S. asset managers marginally more confident that these inflows will be significant.

Brennan Warble, Liquidnet

Brennan Warble, Liquidnet

Market confidence will be a key trigger for greater inflows, according to two-thirds of respondents, far ahead of the rise in interest rates which was seen as a driver for only one in 10 respondents.

“As a group, they’re cautiously optimistic about markets and price action and as part of that, their ability to raise assets,” said Warble. “All of them are active managers, which is a space that has been under pressure from a relative performance standpoint, but close to 60% of them felt like inflows into actively managed funds were likely this year.”

High-frequency trading strategies remain a key concern for equity investors worldwide. 76% of respondents still believe that HFT negatively impacts some of their orders, with 88% concerned about predatory traders in some dark pools. Broker or venue conflicts of interest are also among the top concern for investors, with two thirds ranking this as a high concern.

“Conflicts of interest exposed over the past year have been a real eye-opener for the buy-side and this has led to greater scrutiny of trading venues,” said Tony Booth, head of EMEA sales at Liquidnet, in a release. “What has become apparent in this process is that only a handful of venues can provide the trust, transparency and liquidity that the buy side needs to deliver performance.”

The majority of asset managers surveyed believe consolidation in trading venues is inevitable, in particular among U.S. dark pools where they expect the number to decrease by one-third in 2016.

“We asked them how many pools they there will be by the end of 2015 or the start of 2016, and the average number cited was 30, and we’re sitting right at 45 right now, so that’s obviously a lot of consolidation,” Warble said.

Less than 10% of the U.S. firms surveyed had confidence in the SEC’s ability to make decisions that will positively impact market structure. In EMEA, fewer than 4% of the firms surveyed had confidence that MiFID II would have a positive impact. Additionally, 72% of the firms in the region were concerned about the FCA’s proposed changes to the way research is paid for.

“The general consensus was that regulators are not going to solve these market structure issues,” said Warble. “It’s just further evidence to us that to solve these problems we need to work together as an industry and make sure that we’re advocating for better market structure.”

Featured image by foto_images/Dollar Photo Club

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