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).

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.

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.

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.

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.

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.”