Redefining Value in ESG – Download The Report

Redefining Value in ESG – Download The Report

Growing public appetite for more sustainable investment is being held back by traditional approaches to investment – a new study of global asset managers reveals.

Consequently, the policymakers’ goal towards creating a greener and more sustainable economy risks being undermined unless we can create a more principles-based and outcome-focused approach.

The report identifies two main concerns:

    • Greenwashing risks caused by incomplete or deficient ESG data;
    • And, in parallel, over-reliance on traditional exclusions-based investing, which can cause asset inflation

To address these, asset managers need new ways to generate and manage better actionable data – and insights – that help reveal the full sustainability story about potential investments, so they can invest with more confidence and impact.

Redefining Value in ESG: The Myriad of Paths to the Summit’, is the third and final report commissioned by market maker industry association FIA EPTA on key strategic trends in European markets, focusing on buy-side needs in relation to ESG and sustainable investing.

The report finds a new, broader concept of ‘value’ is needed, which reflects more than just commercial outcomes and recognises other factors, for example, alignment to the UN’s Sustainable Development Goals (SDGs).

Time To Move Away From Traditional Investment Approaches If We Want To Deliver Sustainability Goals – New Report Of Global Asset Managers

Time To Move Away From Traditional Investment Approaches If We Want To Deliver Sustainability Goals – New Report Of Global Asset Managers

New report reveals need for a broader concept of ‘value’ – which requires new ways to manage the ‘myriad of data’ and ensure trust in ESG assets.

GROWING public appetite for more sustainable investment is being held back by traditional approaches to investment – a new study of global asset managers reveals.

Consequently, the policymakers’ goal towards creating a greener and more sustainable economy risks being undermined unless we can create a more principles-based and outcome-focused approach.

The report identifies two main concerns:

    • Greenwashing risks caused by incomplete or deficient ESG data;
    • And, in parallel, over-reliance on traditional exclusions-based investing, which can cause asset inflation

To address these, asset managers need new ways to generate and manage better actionable data – and insights – that help reveal the full sustainability story about potential investments, so they can invest with more confidence and impact.

‘Redefining Value in ESG: The Myriad of Paths to the Summit’, is the third and final report commissioned by market maker industry association FIA EPTA on key strategic trends in European markets, focusing on buy-side needs in relation to ESG and sustainable investing.

The report finds a new, broader concept of ‘value’ is needed, which reflects more than just commercial outcomes and recognises other factors, for example, alignment to the UN’s Sustainable Development Goals (SDGs).

“As investment strategies pivot away from commercial concerns to meeting broader SDG objectives, the web of complexity is increasing.” “Understanding exactly what investment you are making, and with whom, has never been more critical.”

“Sustainable investing remains highly subjective despite regulatory efforts to provide objective clarity. And as ESG expands – from green energy and biodiversity to social impact investing such as zero hunger and quality education for example – it’s clear that overly simplistic exclusion policies will need to be rewritten.”

– Report Author Rebecca Healey

“Like a mountaineer who stands in base camp and sees multiple routes to the summit, let’s recognise that ESG investments and strategies can look different, and may take different paths, yet aim to reach the same goals.​ “Rather than complicating the journey for asset managers by insisting there’s only one route open to them when making sustainable investments, we should adopt a more data-driven approach which allows choice and preference, as long as the summit of sustainable development is achieved.

”Market-making firms are used to managing and analysing granular market data at scale, and from that perspective “empathise with the buy side’s desire for having more refined, multi-dimensional and better data to inform their investment decisions. This is why, as an advocacy organisation, FIA EPTA is committed to help establish a regulatory environment that better enables this.” 

– Piebe Teeboom, Secretary General of FIA EPTA

The report is based on interviews with 35 industry participants including ESG specialists, portfolio managers and heads of trading at asset managers along with liquidity providers, exchanges and ESG data providers. It found:

  • Two-thirds (65%) of respondents now embed ESG factors as part of their investment process across all funds, with a third of respondents only offering separated ESG funds;
  • Seven-in-ten respondents (70%) said data and technology continue to increase in importance in deciding where and how to trade;
  • Two-thirds of respondents (67%) said transparency is a key factor in the selection process of liquidity partners.

“Exclusion policies are too much of a blunt tool. A better outcome would be for me to invest in a company with a low ESG score today but with the objective of becoming a good ESG performer in the future.What happens to those that are excluded for the indices?”

– Head of Sustainability for a large global asset manager

The report was commissioned by FIA EPTA as part of its on-going commitment to provide thought leadership and insights to stakeholders on the key role that liquidity and investor choice plays in well-functioning markets.

It is part of a wider campaign, #WeAreMarketMakers, to improve understanding of what independent market making firms do to enable capital markets, and their contribution to both financial markets and supporting growth in the wider economy.

Meet Martin Polak, Chief Operating Officer at All Options

Meet Martin Polak, Chief Operating Officer at All Options

Can you explain the roles of the main participants in modern capital markets – the market makers, the buy side and the banks 
Historically, banks have had quite a big role in financial markets. However, over the last decade you see that independent market makers have increasingly provided liquidity, even more than banks. This is particularly visible in turbulent markets: independent market makers have proved to stay in the market when liquidity is needed most. Great example was the Covid 19 market turbulence, where market makers ensured liquidity and price formation even when it got a bit wild. 

We genuinely cater to the needs of end-investors (or buy-side), by making sure they can always trade at a fair price, in liquid markets. That benefits retail investors, but also institutional investors, as well as banks. We are simply the oil in the machine, always showing prices. Banks have tended to withdraw from market making over the last decade, although they still represent a lot of transaction volume from their clients.  

We simply provide liquidity for end users. So regardless of who wants to trade: investors, or banks on behalf of clients, we take care of the plumbing, together with the exchanges. Amarket maker we ensure that there can be trading at all times, and that the price on the screen is up-to-date and competitive. 

We genuinely cater to the needs of end-investors (or buy-side), by making sure they can always trade at a fair price, in liquid markets.

How has liquidity traditionally flowed and how has electronic trading and market making changed that liquidity flow? 

Traditionally banks and asset managers used to be key sources of liquidity. But sometimes they struggle to keep up with price formationMarket makers have always been present, although the balance has shifted to independent market makers with banks concentrating on transaction volumes for their clients. 
Market makers make prices tighter, leading to more liquidity and cheaper execution for anyone who wants to trade. Over the last 2 decades, the spread (difference between bid and ask prices) has decreased massively, making trading easier and cheaper for everyone. This is a direct result of innovation and technology, in which we continuously invest. This allows us to trade competitively, ultimately benefiting end-investors because prices are better than ever before. 

The other difference we make in modern markets is to make sure that we are there at the moment where there is no liquidity. So, during the Coronavirus crisis for example, market makers kept quoting prices so that crashes are avoided: investors (retail and institutional) could still rely on accurate price formation, which dampens sell-offs and reduces uncertainty. There’s always someone who buys when someone wants to sell. So I think we prevent market crashes and help markets be more stable, even in turbulent circumstances.

Markets, and market makers, are incredibly competitive. There are always multiple market makers, not just a couple of big ones, but a wide variety of them each with different strategies. So we really compete on price and we really make sure that there’s a liquid market at all times. Diversity of market participants is extremely important. That is steadily improving, and we welcome initiatives like speed bumps which allows as many market makers as possible in the market. This helps a lot with less liquid products that are harder to quote. There’s a wider variety of participants in the market, and this increases market quality for retail and institutional investors alike. Market structure is much more diverse and resilient than ever before.

How are market makers, influencing the future development of markets do you think? 

You want diversity and competition in financial markets, and market makers that have different strategies. Most participants in modern markets use algorithmic technologies – from your household broker to pension funds, and we do too. Because we have a natural incentive to price better, we keep innovating. That benefits the end-investor because their pricing gets better, because we, and other institutions, are competing fiercely.

Market makers are in the business of providing pricing on the exchange, but they do so together with other sources of liquidity, like banks, brokers and asset managers. Exactly because there are more and more innovative market participants, markets become more and more competitive. Combined with circuit breakers (halting the market when price formation is no longer accurate), markets have become much more resilient and liquid than in the past, even under the most difficult circumstances. The recent Covid turbulence has shown that markets are operating as they should and that price formation is continuous and correct.   

So how do we influence the future developmentWhat we try to doand our competitors as well, is to try and make sure that the market becomes tighter and tighter, that everything goes through the electronic book. We are fierce proponents of trading everything on lit markets, i.e. on open and competitive exchanges, where supply and demand meet. What we see as problematic is that increasing trading volume, particularly retail trades, are siphoned off liquid markets into ‘aggregators’, affiliated platforms and SIs, away from exchanges 

This simply means that increasing trade volume is no longer contributing to price formation, deteriorating market quality. We are committed to keep exchanges the central market place for all end-investors, because it ensures them a central market place where they achieve the most competitive and transparent prices imaginable: because of fierce competition among all market participants, including market makers. 

Ideally, everything is traded on one single market as that would actually be on just one central exchange for all supply and demand. But this is not an easy thing to achieve because there are a lot of forces who’d rather want to execute trades through their own affiliates, or investment banks and SIsWe see payment for order flow and executing retail orders at reference prices, without genuine supply and demand interaction, as a threat to market quality. That’s why we really believe that full transparency and competition will be there if everything is traded on one key exchange, for each product. 

also think the whole speed game is not something that we should continue to do. Ultimately it only benefits one or two hyper fast participants while stifling competition for all the other participants. Speed bumps and other incentives to end this highly expensive arms race genuinely benefit end-investors. A pointless speed race ultimately costs end-investors real money because competition decreases and trading costs increase to recover the investments in speedThis is something for our industry, as well as exchanges, to reflect about next. 

And how do firms like All Options support broader parts of society through their activities? 
It‘s important to show that that market making has a lot of positive side effects for society, and that’s just us, doing our job. We’re in the business of providing liquidity, competing in markets, being innovative, and improving the market. Ultimately, society benefits because of that, and that is the single most important factor in everything we do 
I will say that we make sure that people can invest in the cheapest way possible, with execution certainty. We believe that if we continue to strive for better markets, a more competitive and innovative market structure, in the end the result will be beneficial for everyone 

So we focus just on that, and keep stressing this with regulators. You don’t want an oligopoly like in the past or an even more fragmented market structure. Eventually, the end-investor pays for increased fragmentation and trade volumes leaking away from central market places. Low-cost or no-cost brokerage sounds nice, but end-investors pay the price in wider spreads and less competition (albeit this is much less visible to retail investors than paying a couple of euros in trading fees on-exchange).

We believe that if we continue to strive for better markets, a more competitive and innovative market structure, in the end the result will be beneficial for everyone.

Without market makers, how would the way capital markets operate change, and what would be the impact?  
Market makers, innovation and competition ensure tight price formation. It’s the multitude of market participants that make markets better. Market makers are best placed to engage in innovation and competition, because it’s our bread and butter. Without independent market makers, like the ‘specialists’ or handful of brokers we used to have on exchanges, there is no innate incentive to price tightly, leaving money on the table that is pocketed by a small number of exchange members. That’s how markets ran until the late 1990s.  
In an ideal world where you have one market, where everything is traded transparently and deeply competitivelyand everyone can just find each other when they want to trade. Then you would even not need any market makers anymore. But that’s hypothetical. In real life, the competition among market participants, largely fuelled by independent market makers, is the best structure we have at this point.  
So what would happen right now, if there were no market makers? There would be much less trading, poor price formation, poor liquidity, wider spreads and higher transaction costs. The quality of the markets would go down a lot, especially in moments of stress, of which there are more and more nowadays.   
The proof of what we as market makers contribute is highly visible. See how markets have become more and more resilient over time. Trading costs and spreads have decreased by magnitudes over the last 10-15 years. That’s innovation and competition working for the end-investors, even in severely stressed markets. Any other way I think it will be much more expensive to trade. We may not be very visible behind the flickering number on the exchanges, but the benefits to end-investors and society are very real. 


To find out more about All Options, visit alloptions.nl

Turning The Tables On Liquidity Provision – Download The Report

Turning The Tables On Liquidity Provision – Download The Report

Europe’s trading landscape is being fundamentally reshaped as asset managers transform from ‘liquidity takers’ to ‘liquidity makers’. Our new report Turning the Tables on Liquidity Provision lays bare the changes taking place in the UK and EU’s capital markets as the after-effects of the pandemic continue to be felt.

In particular, equity and fixed-income markets are at the point of a radical shake-up as the buyside settles into the liquidity driving seat. And the impact has prompted calls for the current regulatory rulebook to be overhauled to keep pace with the changes, or risk falling behind.

The new report is written by capital markets research specialists Redlap Consulting and is the second in a three-part series on key trends in European markets, focusing on buy-side liquidity needs.

“The pandemic has created an opportunity for a new eco-system to emerge. Asset managers are now increasing control over their order flow across both equities and, crucially, fixed income markets.

“It’s a real game-changer as the fixed income markets were the last bastion of sell-side liquidity provision. We’re witnessing a sea-change in the way the markets will operate in the future.”

– Report Author Rebecca Healey

The report reveals asset managers are increasingly turning to automated trading to execute their orders. And because of increased innovation in trade initiation, creation, and execution, they’re able to engage with more liquidity providers, including independent market makers.

These new systems help to solve traditional impediments in bond markets which prevented the buy-side from engaging with a more diverse and broader set of counterparties due to the infrequency with which bonds trade and the risk of incurring any information leakage. Now, the ability to automate trading intentions as well as order flow provides the buy-side with the ability to maximise potential engagement yet still protect information about the trade and prevent undue price movements.

Another key finding is that asset managers require better post-trade data to select the most appropriate counterparty to trade. Crucially, respondents want to better understand whether their order flow has provided or taken liquidity – which determines who they select as a trading counterparty.

Piebe Teeboom, Secretary General of FIA EPTA, the European industry body for market making firms, which commissioned the report.

“The trends identified in this report are significant as they signal a clear shift in the balance of liquidity provision in European markets. It’s a fundamental realignment which policy-makers should consider as they update the regulatory rulebooks in both the EU and UK.”

– Piebe Teeboom, Secretary General of FIA EPTA

Based on interviews with global heads of trading at 30 EU and UK based asset management firms with over $35 trillion of assets under management, the report found:

 

    • Nine out of ten respondents (87%) want to maximise their liquidity access with market making firms;
    • Seven out of ten respondents (70%) said data and technology continue to increase in importance in deciding where and how to trade;
    • Two-thirds of respondents (67%) said transparency is a key factor in the selection process of liquidity partners.

“Between 60-70% of our order flow was done on a bilateral basis historically. In the past six months that ratio has flipped. We are changing how we trade and who we partner with as a result.”

– The Head of Trading, Mid-Sized European Asset Manager
European execution landscape being fundamentally reshaped as Asset Managers transform from Liquidity Takers to Liquidity Makers

European execution landscape being fundamentally reshaped as Asset Managers transform from Liquidity Takers to Liquidity Makers

New report reveals equity and fixed-income markets at point of radical shake-up – and prompts calls for an overhaul of market regulation

Asset managers now hold the keys to liquidity provision on Europe’s capital markets in a fundamental shift in the financial ecosystem and its future development, a new study reveals today.

The widespread adoption of automated trading – which accelerated in the pandemic – has given asset managers greater direct access to new trading partners providing more efficient and diverse options to trade.

This empowerment is shifting the traditional balance of the markets as asset managers are increasingly becoming ‘liquidity makers’, rather than ‘liquidity takers’ relying solely on traditional sell-side provision of execution services.

These are the findings of a new report, published today, called Turning the Tables on Liquidity Provision, written by capital markets research specialists Redlap Consulting. It is the second research report in a three-part series on key trends in European markets, focusing on buy-side liquidity needs.

Significantly, this structural shift should prompt regulators to overhaul current markets rules, says Piebe Teeboom, Secretary General of FIA EPTA, the European industry body for market making firms, which commissioned the report.

“The pandemic has created an opportunity for a new eco-system to emerge. Asset managers are now increasing control over their order flow across both equities and, crucially, fixed income markets.

“It’s a real game-changer as the fixed income markets were the last bastion of sell-side liquidity provision. We’re witnessing a sea-change in the way the markets will operate in the future.”

– Report Author Rebecca Healey

“The trends identified in this report are significant as they signal a clear shift in the balance of liquidity provision in European markets. It’s a fundamental realignment which policy-makers should consider as they update the regulatory rulebooks in both the EU and UK.”

– Piebe Teeboom, Secretary General of FIA EPTA
The report shows how asset managers are increasingly turning to automated trading to execute their orders. And because of increased innovation in trade initiation, creation, and execution, they’re able to engage with more liquidity providers, including independent market makers.

These new systems help to solve traditional impediments in bond markets which prevented the buy-side from engaging with a more diverse and broader set of counterparties due to the infrequency with which bonds trade and the risk of incurring any information leakage. Now, the ability to automate trading intentions as well as order flow provides the buy-side with the ability to maximise potential engagement yet still protect information about the trade and prevent undue price movements.

Another key finding is that asset managers require better post-trade data to select the most appropriate counterparty to trade. Crucially, respondents want to better understand whether their order flow has provided or taken liquidity – which determines who they select as a trading counterparty.

Initiatives such as improved FIX Protocol tagging are already benefitting asset managers, but further improvements to post-trade data are needed, respondents reported.

The report – based on interviews with global heads of trading at 30 EU and UK based asset management firms with over $35 trillion of assets under management, found:

 

    • Nine out of ten respondents (87%) want to maximise their liquidity access with market making firms;
    • Seven out of ten respondents (70%) said data and technology continue to increase in importance in deciding where and how to trade;
    • Two-thirds of respondents (67%) said transparency is a key factor in the selection process of liquidity partners.

“Between 60-70% of our order flow was done on a bilateral basis historically. In the past six months that ratio has flipped. We are changing how we trade and who we partner with as a result.”

– The Head of Trading, Mid-Sized European Asset Manager
The report has been commissioned by FIA EPTA, which represents Europe’s leading market making firms, as part of its on-going efforts to provide thought leadership and insights to stakeholders on the key role that liquidity plays in well-functioning markets. In parallel, FIA EPTA recently launched a new campaign to drive greater understanding of what independent market making firms do, and their contribution to both financial markets and the wider economy.

“Market making firms are clearly a driving force in the evolution of the financial ecosystem. Their combination of technology, competition, innovation and capability to work with the buy-side provided a lifeline for many asset managers during the pandemic and has created the conditions for a fundamental reshaping of liquidity provision in European capital markets going forward.”

– Piebe Teeboom, Secretary General of FIA EPTA