Liquidity Outlook Questioned

Terry Flanagan

Nearly 90% of European buy-side equity traders believe liquidity will not return this year according to new research from K&K Global Consulting.

Concerns over liquidity were the most important issue for the buy side. In the survey 86% of buy-side firms were either uncertain or did not think that liquidity would return by the end of this year, with half not sure that it will return in 2014. The consultancy interviewed 40 European equity traders from 40 different asset managers between March and June this year.

The report said: “The current level of fragmentation is perceived as amplifying the liquidity issues and the buy side would generally welcome a market consolidation to fewer trading venues with the caveat that higher transaction costs must be avoided.”

Fragmentation was viewed by 83.3% of respondents in the survey as amplifying liquidity issues, as it has become more difficult to find and match the right trade sizes.

Earlier this week, the U.S. Securities and Exchange Commission launched a website allowing public access to data from its new market information data analytics system (MIDAS), which collects information on equities traded across all the US exchanges, while the regulator reviews market structure. However this data is not available in Europe because there is no consolidated tape for the region.

In the survey, 95% of firms said they trade in dark pools but these off-exchange venues were the second largest concern with issues around being unable to trade large blocks, potential information leakage and fear of being gamed.

To address these issues in the U.S., the Barclays LX dark pool has gained share by classifying clients by the way they behave, rather than by their size or fees. The bank monitors client behaviour in real-time to address overly aggressive strategies with the ultimate option of blocking participants.

The other important issues cited in the survey were transaction cost analysis, commission sharing agreements and sell-side restructuring.

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