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 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.

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.