Certainty amidst uncertainty: How the Covid-19 pandemic catalysed a paradigm shift for market makers

Certainty amidst uncertainty: How the Covid-19 pandemic catalysed a paradigm shift for market makers

Interview with Piebe Teeboom, Secretary General at FIA European Principal Traders Association (FIA EPTA)

 

Q. FIA EPTA’s latest thought leadership report, Liquidity in the Time of Covid explores how the Covid-19 pandemic changed the role and reputation of market makers. In your opinion, how significant has this change been?

In recent years, market makers have been playing a growing role in liquidity provision within European capital markets. But it’s fair to say that this has been an ongoing evolution, not revolution, and has been happening somewhat under the surface.

However, when the pandemic hit, all of that changed. Many more market participants needed to quickly change the way they accessed liquidity, and market makers offered a reliable and very efficient way for them to do that.

Covid-19 catalysed a paradigm shift in the way people perceived market makers’ value; and in the amount of added value market makers were able to bring. To the markets and to wider society.


Q.
What were market makers offering during the pandemic that others were not?

The short answer is certainty. Whether you are an asset manager or a retail investor, the fact that market makers commit to being always present in the markets means you can always buy or sell when you want to, and at the best price. You’ll never have to wait to make a transaction.

You can imagine how important that certainty was during the Covid crisis, when all around there was so much uncertainty and trading was , incredibly choppy. It’s why the pandemic created a real light-bulb moment for asset managers in terms of the way they view and engage with market markers.

“The pandemic has the pandemic created a real light-bulb moment for asset managers in terms of the way they view and engage with market markers.”

 Q. Now that the initial uncertainty created by Covid has passed, do you think the more central role market makers have carved out will continue?

I think we are entering an exciting new chapter for the market making community because they are now being seen more as a genuinely viable and reliable option when it comes to liquidity provision. They have shown the benefits that cutting-edge electronic trading can bring to the markets, especially in the bond space.

The buy side asset managers interviewed for the Liquidity in the Time of Covid report were clear that they are keen to have more diversity now in the way they access liquidity, with market makers emerging as new liquidity partners in the wider market mix.

I think that what the last year or so has taught market participants is that greater diversity of options makes for more resilient financial markets that can weather unexpected storms. And that is good news for market makers and good news for everyone else, from nest-egg investors to asset managers.

“The last year or so has taught market participants is that greater diversity of options makes for more resilient financial markets that can weather unexpected storms.”

 
Q. Did you launch the #WeAreMarketMakers campaign as a response to the changes brought about by the pandemic?

The catalyst for the campaign was actually much closer to home. This year marks the 10th anniversary of FIA EPTA and, just as we have evolved as an organisation over the last decade, so the market making community that we are proud to represent has further matured in that time too. We wanted to do something to mark our 10 year anniversary that would also show the contributions of modern market makers to European capital markets and wider society.

One of the key aspects of the campaign will be putting a face to the innovators behind the code. You’ll see lots more of them over the coming months. We’ll be launching more thought leadership reports exploring different aspects of why liquidity matters so much to well-functioning markets. And we’ll be tackling some of the common questions those in the market making community receive about what they do, and how they do it. Perhaps addressing some myths head-on too.

While the pandemic wasn’t the reason for launching #WeAreMarketMakers, it has created a timely conversation about the market making community and its often unperceived benefits to markets and wider society. Today, the campaign feels more relevant and important than ever.

 

THE ‘LIQUIDITY IN THE TIME OF COVID‘ REPORT IS AVAILABLE TO DOWNLOAD HERE.

Paradigm shift as market makers take center-stage

Paradigm shift as market makers take center-stage

Paradigm shift as market makers take center-stage in European liquidity provision during Covid-19 pandemic

  • New research report reveals independent market making firms becoming trusted partners to European buy-side after stepping up to support institutional investors during pandemic
  • Surveyed asset managers appreciate market makers’ continuous presence in the markets
  • Recognition accelerated by adoption of technology and screen-based electronic trading during lockdown

The ability of independent market making firms to provide essential liquidity to Europe’s pension funds and other asset managers during the Covid-19 financial crisis has accelerated their recognition as a vital part of the European capital markets eco-system.

A new research report surveying European buy-side participants reveals for the first time how market makers stepped up to help the asset managers when some of the traditional providers of risk capital partially withdrew from certain market segments in Europe in the early stages of the pandemic.

As asset managers – particularly small and mid-size funds — were seeking additional sources of liquidity the independent market makers were able to step up. This was made easier as the increasing electronification of the markets enabled asset managers and market makers to engage whilst working from home.

Now, clear signs are this shift is becoming permanent as asset managers better appreciate what market making firms’ offer as liquidity partners, including greater transparency and continuous presence in the markets.

These benefits mean investors can trade instantly and with certainty, enabling them to adjust their investment strategies and manage their risk.

The insights are published today in a new study called Liquidity in the Time of Covid. It Is based on detailed interviews with 30 EU and UK-based Global Heads of Trading at asset management firms holding $35.6 trillion collectively.

The study is written by independent financial services research group Redlap Consulting. It was commissioned by FIA EPTA, which represents Europe’s leading market making firms, to drive greater understanding of what independent market making firms do, and their contribution to both financial markets and the wider economy

Report author Rebecca Healey, founder of Redlap Consulting, said:

“Covid-19 continues to redefine the trading landscape as the pandemic lifted the veil on the role market-makers can play in liquidity formation.

 

“Liquidity challenges in bond markets early in the pandemic created a vacuum forcing the buy-side, to find new trading partners and access points to liquidity – and market making firms stepped up to fill the void.

 

“Now as asset managers continue to partner more directly with these firms, they have been able to benefit from a wider, more diverse pool of counterparties in how and where they can execute investment strategies; while liquidity providers have the opportunity to re-position themselves and build new partnerships.”

 

One Head of Trading at a large global asset manager interviewed for the report said: ““We definitely engaged more with [electronic liquidity providers]; as [some sell-side firms] stepped back, they stepped up.”

Piebe Teeboom, Secretary General of the FIA European Principal Traders Association, said:

“The clear message from this report is that asset managers have developed a far more detailed and positive understanding of market makers and the liquidity provision they offer.

 

The pandemic and, in particular, the lockdowns accelerated a longer-term shift towards screen-based trading as people were forced to find new ways of working. This created a watershed moment as the buy-side engaged more with market making firms – and consequently became more appreciative of the benefits of better and more transparent prices, the constant liquidity provision and optionality the firms offer.

 

“That reappraisal and recognition – similar to a light-bulb moment – has now cemented the role of market making firms as mainstream actors in the capital markets ecosystem.”