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

by Adam Powell
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