According BMLL Technologies data, bilateral trading accounted for 35% of overall notional traded as of November 2024, including request for quote (RFQ), off-book on-exchange, over the counter (OTC) and SI volumes both above and below the large in scale (LiS) threshold. This marks a 12% increase since January 2021.

Defining what falls into the bilateral sphere is important. Regulators in the last few months have been attempting to clean up reporting flags in a bid to offer greater transparency to participants looking to better understand the landscape.

One of the most notable bilateral growth stories, however, is that of the off-book on-exchange segment. This umbrella term again accounts for a whole host of things including retail flow and high touch agency crosses. Cboe and Aquis’ new VWAP offerings will also print their flow as off-book on-exchange for example.

Central to the growth of the off-book segment and perhaps responsible for ruffling the most feathers is a relatively new workflow whereby non-bank liquidity providers quote directly to the buy-side via their execution management systems (EMS) leveraging actionable indications of interest (IOIs). It’s this new growth among other areas that has attracted notable attention from the industry and sparked new offerings from the more traditional players looking to preserve their market share.

The benefits of streamlined buy-side workflows are clear: offering better price improvement, reduced market impact and time to market and greater flexibility around liquidity access. What’s more, with volumes on the lit market continuing to decline, one can hardly blame traders for exploring alternatives to traditional workflows.

That being said, the bilateral segment is becoming increasingly meaningful with both alternative and now traditional players exploring new workflows, and some participants are now beginning to question whether such a level of bilateral trading exists that could be detrimental to the market’s long term health. Some participants have even begun suggesting that the European equities market could find itself on track to adopting an almost completely off-exchange foreign exchange model in the next few years if it continues on its current path. However, this eventuality is highly unlikely. Said bilateral workflows rely heavily on a reference price from the lit markets. Ironically, the thing that stands to be damaged if too many volumes move off-exchange.

For buy-side traders, the appeal of executing without going out to market is – understandably – hard to resist, but the question as to whose job it is to now moderate the level of bilateral liquidity in the market is now somewhat continuously being asked.

“I can understand the appeal to a buy-side trader thinking ‘I can clear my entire blotter with one click of a button so why don’t I do that and not have to worry about direct market impact?’,” explains T. Rowe Price’s equity trader and market structure analyst, Evan Canwell.

“There’s definitely a place for bilateral liquidity, but it’s incumbent on us as the buy-side to understand what we’re interacting with and think about the balance. It’s like fast food, it might feel good in the short term but there could be unintended consequences for the longer term health of the trading ecosystem.”

Non-bank providers

One of the most spoken about names in this context is, of course, Optiver. While the firm is not solely responsible for the growth of off-book on-exchange, the market maker’s model of connecting directly to the buy-side via EMS has taken the market by a storm. The firm’s model is risk filling but without acting as a systematic internaliser (SI).

“It [bilateral trading for blocks] never really took off as a product whereas the way I look at the more recent developments in bilateral liquidity, it’s for a lower liquidity demand which does feel more sustainable,” says Legal & General Investment Management’s global head of trading, Ed Wicks.

While historical bilateral connections with other alternative providers – namely XTX Markets – have historically been more focused on smaller flow, Optiver’s model offers the opportunity to trade blocks of 5-20% of average daily volume (ADV), The TRADE understands. And it’s this element that has piqued buy-side interest. It’s easy ‘fill or kill’ model means traders don’t have to go out to market in order to execute, simplifying workflows and reducing market impact.

“The liquidity provision workflow can be a useful tool, especially given the recent record lows of lit liquidity. If you can get done and risk filled, there’s an efficiency to that,” says Hayley McDowell, EU equity electronic sales trader and EU market structure Consultant at RBC Capital Markets.

It’s this efficiency that has seen the buy-side continue to use this model of trading to execute flow. According to BMLL Technologies data, as of November 2024, off-book on-exchange constituted 58% of all bilateral trading activity – around €376bn – evidencing how attractive this model is to firms in comparison with multilateral venues and platforms in the lit markets.

“If I see a workflow solution that is potentially saving costs for funds and ultimately delivering good outcomes for clients then we have to evaluate it,” adds Wicks.

“For us, it’s [bilateral] more of an efficiency workflow tool for the lower liquidity demand orders or baskets we have. We consume the feed into our EMS so when an order hits our desk we can see straight away whether the whole order can be fulfilled by the bilateral liquidity. Not having to declare anything is an asymmetric benefit to us because we can see whether that liquidity can be fully filled on a fill or kill basis.

“If we were to go into the secondary markets utilising a liquidity seeking algorithm that would have a cost relative to trading at midpoint on the bilateral feed. For a subset of our flow from a cost perspective and an efficiency perspective it makes a lot of sense to us to utilise that bilateral liquidity.”

In light of the growing bilateral sphere, agency brokers such as BTIG and Redburn Atlantic have also been busy launching services that aggregate and streamline liquidity from alternative and electronic liquidity providers (ELPs) and connect the buy-side with them via an EMS or via a custom algorithmic strategy, all with the aim of easing the strain on the buy-side by channelling liquidity to them via one location.

“Traditional liquidity aggregation is not an option when trading bilaterally, but connecting clients to multiple competing quotes – on a fill-or-kill basis – via a single access point saves them time, limits selection bias and increases overall hit rates,” head of trading and algorithmic solutions at Redburn Atlantic, Phil Risley, tells The TRADE.

“The challenge in optimising the approach to principal liquidity, is to balance the ELP’s need to understand the profile of the flow with which they interact and the requirement to minimise information leakage.

“Ultimately, the goal is to create a virtuous cycle, with high quality flow incentivising larger and more consistent quotes – aligning interests and ensuring everyone wins.”

Redburn’s offering claims to tackle issues around market impact by operating under a fill or kill basis. Each client order is matched immediately in its entirety with a single ELP or not at all. It is directly available to the buy-side with qualifying flow via their EMS as a custom algo strategy. A spokesperson confirmed that the firm is speaking with all of the major non-bank SIs regarding onboarding. The ELP liquidity is not aggregated but available from a single point of access.

BTIG’s offering currently takes in live streams from three ELPs. Based on client preferences, it streams the best quote into the buy-side client’s EMS. A source has confirmed that the number of provider partners used by BTIG is growing.

Said quote can be anything from mid to far point liquidity in different shapes. If the client wants to interact they click to instantly execute or use OMS automation. The client then faces BTIG for settlement so there is no additional onboarding required.

The client has the choice whether to remain anonymous or allow ELP to profile them which may result in tighter pricing. This offering is also available via BTIG algos which for some buy-side clients may fit workflow better with wheels.

Traditional banks strike back

Given the growth of market share seen by these alternatives, the market has also seen a wave of new interest in this area by the traditional banks as they look to maintain their market share and retain commissions.

Major sell-side have offered systematic bilateral liquidity for years now but the practice hasn’t seen mainstream adoption for several reasons. Historically connecting bilaterally to a CRB for example has always been seen as a bit of a blind play as you don’t necessarily know what else is in there. The services for blocks have typically also only been on an ad hoc basis for banks’ larger clients.

“The evolution of IOIs being sent directly to client EMS’ is a net positive and opens up further trading opportunities and importantly enhances workflows, particularly when offered alongside a robust TCA process to help manage the challenges of longer term parent level impact,” explains Goldman Sachs’ managing director and head EMEA electronic and program trading, Alex Harman.

“This year we have been working with the major EMS’ to utilise actionables to deliver liquidity in several products; blocks, IS and close benchmarks. Expect to see a lot more from us here in the future.

“Our systematic GMOC product was the first of its kind and remains a heavily used product as part of our close benchmark offering. More recently we launched our DTC Stealth product, which is a tactic within our SOR that leverages dedicated liquidity from our systemic internaliser, plus other non-displayed liquidity with the aim to fully fill parent orders.”

With alternative players now targeting larger flow, major sell-side are looking to create their own direct connections via EMS providers in order to compete in a second wave of the bilateral evolution.

“I know several [big banks] are building aggregators and liquidity workflows that try and mimic some of the bilateral features. Whether we see a pure bilateral product from the investment bank similar to what we see from the alternatives I still don’t know if that will be the case,” adds Wicks.

“More traditional liquidity providers like the investment banks are now looking at it with some degree of urgency to try and insert themselves into that workflow. I don’t know how many more [bilateral offerings] we would need frankly but we will look at them when they come.”

Fast food?

With both electronic and alternative players cementing their workflows and major sell-side looking to follow suit, the bilateral segment is becoming extremely meaningful for both the buy-side and the wider market. And this meaningfulness is what’s raising some eyebrows. With the proposition now irresistibly attractive to the buy-side, the longer term impacts are now being assessed.

“The issue comes if too much of your flow goes that way,” says McDowell. “It can also impact on-venue liquidity. If has a trader has a large order on the pad, they might go to an ELP first, then maybe an SI, before going to the order book last.”

Given the existing decline of lit, this natural evolution – and it is a natural evolution – has the potential to become a bit of a self-fulling prophecy as spreads and toxicity increase in the lit market.

“Most buy-side firms and a lot of market participants would recognise that it’s in most people’s interests to make sure that lit markets remain a functioning viable part of the market,” concurs Wicks.

Traditional sell-side bring with them whole swathes of other auxiliary services that are bundled with their services across settlement, payments and research to name a few. Electronic and alternative liquidity providers do not provide these extensively and their services are usually limited to the execution side of things.

“Longer term, if we end up with a large part of the market trading bilaterally then we may start seeing impacts elsewhere – for example, will traditional brokers start reducing resources in other areas to focus more on liquidity provision?” Asks Canwell. “Will we see reduced price formation and greater toxicity on-exchange if smaller orders end up in bilateral mechanisms?”

The role of the regulator

The question now being asked by many is: what is the role of the regulator? Some participants are asking whether it is fair that some market makers should be able to risk fill clients without operating as an SI and the associated pre-trade transparency.

Ultimately, given this is the natural evolution of where the market is heading, it’s hard to see an eventuality where regulators would step in to prevent it. Famously, regulators tried to tackle decreasing exchange traded volumes with caps on dark trading in Europe during the Mifid II Review and the multi-year tug-of-war esque saga that achieved an arbitrary result of deleting the 4% and 8% double volume caps (DVCs) in favour of a single cap of 7% has largely been criticised as a waste of time.

“If they [regulators] think too much is being done off-exchange and there’s not enough price formation on-exchange, potentially I could see them stepping in,” says Canwell. “One area where there might be more regulatory scrutiny is around the closing auction because there’s a lot more being done off the primary closing auction in recent years.”

One area regulators should and are looking to change is around transparency. Reporting flags were one such area that was focused on by both UK and European regulators in April in order to simplify the regime and try to understand a bit better where volumes are being executed within the market. The concept of what is addressable and what is not is something now being explored by participants and regulators and could result in further probing from watchdogs.

“Reporting changes had a profound impact on the liquidity landscape. It was confusing before and a lot of the flags didn’t necessarily make sense. There was a lot of repetition and noise,” says McDowell. “Traders are looking for more transparency in the off-book space. Some participants are using “off-book” as a means of printing activity, but peers and clients are unclear about exactly what off-book on-exchange is.”

All roads lead back to the consolidated tape. And there is, of course, the likelihood that we will have a consolidated data source in the next decade (fingers crossed). This will also bring with it extensive transparency that will help both participants and regulators alike to better understand and interpret the market picture around percentages of liquidity accounted for by different segments. Given how participants and regulators alike are turning their attention to the addressability of flow, it may even be a worthwhile venture to do an independent analysis of how stable pricing is in Europe.  

“The market structure needs to respond to this change in dynamics and central to this is the delivery of a consolidated tape in both the UK and EU so all market participants can understand what liquidity is available where,” said Eleanor Beasley, EMEA equities COO and head of market structure at Goldman Sachs. “Understanding the different mechanisms leveraged to deploy bilateral liquidity is important as is understanding where this volume is printing.”

The growth of various different trading workflows that fall under the bilateral umbrella is undeniable and certainly something that participants and regulators alike should be keeping tabs on. Whether or not it’s something watchdogs should intervene with is another matter. Bilateral liquidity only works to a certain size. There will always be a portion of the market that requires public markets and going out to find the other side.

The market’s natural evolution is what it is. If these providers are offering buy-side traders an attractive service, who’s to say it is wrong or right? Perhaps as Canwell noted earlier the onus is on the buy-side to steer the market in the “right” direction.

However, when an order hits the pad, it’s rare for a trader to sit back and think about the wider long term market implications instead of whether a workflow will achieve the desired best outcome for their trades and subsequently their clients. On the current trajectory, our markets are likely set to look fairly different in the next five years. Whether that’s wrong is one for the philosophers that walk among us.

The post Liquidity, it’s a two-way street appeared first on The TRADE.

Paul Humphrey

The latest funding round included Optiver as lead investor, with co-participation from existing investors FactSet, Nasdaq Ventures, IQ Capital’s Growth Fund, as well as additional investment from CTC Venture Capital.

As part of the move, Optiver has also joined BMLL’s board of investors. 

The investment comes at a time of continued accelerated growth for BMLL. Over the last 18 months, the business added more than 40 equities and futures datasets globally and today covers 98% of the MSCI All Country World Index.

BMLL has also grown its global footprint, opened a US-base and increased its client roster.

“We are thrilled to welcome Optiver as a significant shareholder and are delighted to have the ongoing support from our existing investors who have backed the latest round,” said Paul Humphrey, chief executive at BMLL.

“We have an incredibly diverse team of supporting investors, with deep-seated global market and technology expertise, and we are poised to scale the business further, as we build out and scale our data feed business and futures coverage and wider product offering globally.”

Read more: BMLL expands kdb+ database offering with INQDATA technology partnership

This investment follows BMLL’s Series B round in October 2022, which secured a $26 million strategic investment from FactSet, Nasdaq Ventures and IQ Capital’s Growth Fund. Snowflake Ventures joined the Series B round in September last year.

BMLL has previously raised $36 million through Series A and seed funding rounds.

“The high quality of BMLL’s data, their advanced analytics tools and their best-in-class team have together significantly improved our ability to generate insights that influence our strategies,” said Pat Cooney, managing director at Optiver Europe.

“We believe these benefits can extend beyond our firm and provide substantial value to other market participants as well.”

The post BMLL secures $21 million injection from Optiver-led investment round appeared first on The TRADE.

This landscape has experienced notable evolutions in recent years due to advancements in technology, increased market participation, and regulatory changes. An understanding of the current liquidity landscape allows traders to optimise their strategies, manage risks more effectively, and make informed decisions in both stable and turbulent market environments. The topic of liquidity and its shifting dynamic has been a key theme amongst the industry at various conference held over the last few months.

Read more: Combating liquidity challenges in Europe requires caution especially when considering alternative means of trading

Speaking to The TRADE about key themes in this space, Mark Montgomery, head of strategy and business development at big xyt, notes “We’ve had the change in the RTS 1 and 2 OTC trade flags. That as a comment sounds dull, but is actually significant beneath the surface; what’s actually happened is with the FIX community getting involved and the regulators listening, they’ve got rid of a lot of the noise that made-up non addressable volumes in the marketplace.

“The big thing about that is the trades that are going on off-book, off-venue, off-exchange and are not contributing to price formation – i.e. it’s noise, it’s synthetic trades or it’s not actionable or addressable – we’ve seen evidence of a big decrease in that and we’ve also seen within that, some more specific and better flagging of trades that have particular characteristics.”

Montgomery went on to add that benchmark trades, which might be a program trade benchmarked to something or a trade that was a bit vague beforehand, are experiencing more specificity around the flagging and the reduction in noise.

“One of the challenges within all of this is you can see percentages swing. Because OTC was so big, it makes the growth in some of the other mechanisms maybe look disproportionately large, but in value terms, we’re going to have to look a little bit deeper and see what it means for the subcategories,” adds Montgomery.

Electronic liquidity providers

Another key theme highlighted by Montgomery is the bilateral liquidity provision being offered by electronic liquidity providers. He notes that these providers “were previously providing liquidity to the markets in a way where they interacted with the exchanges and they were known to certain people in the community, but not everybody. However, today, we see ELPs more active and vocal about their provisions and what they offer.”

Speaking to The TRADE about the evolving nature of ELPs in relation to the buy-side, Anish Puaar, head of European equity market structure at Optiver, adds: “We’re seeing more interaction between buy-side firms and ELPs in equities, be that directly or via SIs. The liquidity on offer from ELPs is another channel that the buy-side can look to use alongside other execution options.” Optiver currently connects directly to the buy-side via execution management systems (EMS).

“As with all participants, we believe it is important for ELPs to be open and transparent about how they provide liquidity. As buy-side-to-ELP interaction grows, it’s important to make sure the nature of these interactions is well understood,” says Puaar.

Reporting

Elsewhere, Montgomery discussed the nature of reporting from ELPs in relation to the SI mechanism. “It seems like ELPs are not necessarily reporting their trades in the way that we expected, which is through the SI mechanism, because it would seem to be systematic and a risk price. But actually, they’re doing it through a waiver through off-book (on-exchange) in certain cases,” he says.

What this means is there’s an interesting shift in risk provision and risk transfer in the marketplace.

“If I’m a buy-side firm and I want to suddenly trade, rather than trading agency through a vanilla VWAP algorithm, I’m suddenly trading on risk,” adds Montgomery. “This could either be in a block or throughout the day with a risk counterparty where I’m giving away a little bit more information to somebody who can do more in terms of price movement, in terms of access to other markets and other venues with that information and with that flow.”

This could ultimately result in a shift which could be taking place away from the bank risk desks and into the ELP risk desks. Montgomery explains that that is “something that the banks will be watching very carefully, and I think it’s something that the ELPs will be looking to see how they manage that risk.”

The post Regulation and fragmentation’s influence on the current liquidity landscape appeared first on The TRADE.

Double volume caps (DVCs) were deleted as of 28 March in the original Mifir text published in January. However, the previous text only authorised the enforcement of the SVC [single volume cap] in 18 months’ time – leaving an unintentional window with no caps thanks to the clerical error. Brussels subsequently began exploring possible ways to close the loophole in the new share trading rules. In the last days of March, the European Commission subsequently rushed through a last-minute draft revision to its Mifir text to plug the loophole, keeping the DVCs in place until the implementation of the new single volume cap.

The regulator’s mistake and subsequent decision to fix it has re-sparked an existing discussion around why watchdogs are focusing their attentions on micro changes to regimes and not on the wider issue around low volumes in Europe – especially when the result has little to no impact on the markets. 

Dark trading became the poster child of post-Brexit regulatory discussion in the UK and Europe, with the Bloc championing lit transparent trading throughout. The DVCs regime included in the January Mifir text had followed more than six years of deliberation over the desired cap on dark trading in the Bloc, with the European Commission and Parliament finally settling on the deletion of the 4% and 8% caps in favour of a single cap of 7%. 

“In my opinion, the last-minute decision [in March] wasn’t a surprise as it’s been clear from the beginning of Mifid II that politicians and regulators across Europe are committed to the DVC mechanism,” Evan Canwell, equity trader and market structure analyst at T. Rowe Price, tells The TRADE.

An unintended experiment 

Without the clarification, ESMA had the opportunity to stop enforcing DVCs until Q4 of next year. Had the last-minute changes to the text not come through, Europe would have found itself taking part in an unintended experiment to test how far dark trading could go if left uncapped. 

“While I think it’s unlikely that ESMA had ever planned to stop enforcing the DVC mechanism during this period, it would have been a fascinating opportunity to observe the shift in market dynamics without any artificial constraints on dark trading,” adds Canwell. “This would also have allowed market participants and regulators to engage in discussions on both the optimal thresholds and the appropriateness of any future dark caps, in a fully data-driven manner.”

Following reports of the loophole in early March, participants and venues in some cases had begun to put in place contingency plans should dark trading be left uncapped. Those most vocal against the use of dark caps during the European regulatory discussions came from the buy- and sell-side, with many suggesting the new single cap of 7% was arbitrary and querying how the watchdog had reached this conclusion. Many were therefore keeping close tabs on the saga in March, watching the events unfold in the hope that what they considered an unnecessarily complex detail might not come to fruition.

“There was a genuine hope that there could be an opportunity for those caps to be repealed. I suppose intuitively you would expect a certain level of disappointment on a number of levels,” says James Baugh, head of European market structure at TD Cowen. “One is that we found ourselves in this position, but also perhaps that there wasn’t a willingness to use it as an opportunity, to provide that chance to see what would happen without the caps in place.

“If this was a mistake in the drafting, it would clearly take some courage to roll the dice to see what would happen if the caps were lifted for that interim period.”

The reality is that other regions where dark trading has been left uncapped have not seen the segment grow out of control. In fact, the US, which doesn’t enforce caps, and the UK, which ditched caps post-Brexit, have both seen dark trading reach a certain level and then plateau. In the UK, dark trading has peaked at around 13% of monthly traded volumes on exchange since removing its caps. Meanwhile in Europe, stocks are rarely close to the DVC thresholds. 

“When we look at the double volume cap regime, it’s not like we’re seeing those European markets buffer at those levels,” adds Baugh. “It’s not like dark trading has got to those levels and therefore, it’s constrained at those levels. That’s not the case at all. If anything, the data would show you that it’s trading a couple of percentage points below those current levels.”

The market has evolved towards other forms of execution in light of the caps on dark trading, meaning a significant shift to dark venues is more than unlikely. 

“There are a large number of well-established alternative venues (such as periodic auctions) which allow for trading in a ‘dark-like’ manner and have been firmly embedded in routing logic across Europe,” adds Canwell.

Why is it then that we have seen two major primary exchanges move to launch dark books in the last few months when it was those exchanges that were most against removing caps on dark trading during Mifid discussions? Both Euronext and Deutsche Börse have set their sights on dark trading in the last year. Euronext confirmed in May 2023 that it was set to launch a dark trading service. The service went live trading in March but has seen slow uptake as of yet.

This news was followed by rival exchange Deutsche Börse announcing own its plans to develop a midpoint trading functionality in March earlier this year. The new functionality has an envisaged launch of November. Known as ‘Xetra Midpoint’, the functionality is a customer-driven project according to Deutsche Börse and will be integrated into the Xetra market.

The events around the DVC correction when laid alongside the recent launches paint an interesting picture and begs the question: what is Europe trying to achieve? Europe as a region is one of the most fragmented markets to trade with three times the number of exchanges as the US, 10 times the number of listing venues and 20 times as many post-trade providers.

Central to many panels at recent events is the level of fragmentation Europe has reached alongside its comparatively low volumes to the rest of the world. While fragmentation is essential to competition, it can go the other way and harm markets by causing investors to widen the prices they show and reduce their size.

Speaking at a recent Bloomberg Intelligence event which explored ‘liquiditiy in transition,’ Eleanor Beaslety, COO, equity execution, Goldman Sachs, said: “Innovation is great and if something has a USP that brings more volumes into Europe, that’s great. What we don’t need is more of the same. There are a number of dark books. The interesting thing with primary markets is potentially they have unique liquidity in regions that are very national so that could lead to more liquidity coming to the fore. Where it’s just another venue, it’s expensive and it’s another overhead.”

Moving from a micro focus to a macro one

With volumes in Europe on a continuous decline – seen most drastically on the lit continuous order books – it forces participants to question whether or not regulators are focusing on the right areas, with many participants suggesting we should zoom out from these time-consuming micro debates and assess the wider macro landscape to support growth in Europe. 

“We’re rarely in a steady state with regulation. We implement something and then months down the line we’re looking to change it,” said Anish Puaar, head of European equity market Structure at Optiver, also speaking at Bloomberg’s event.

“It’s every time something is introduced – e.g. DVC or SI thresholds – and this tinkering with micro aspects takes up a lot of time and doesn’t have any meaningful change in the market. Europe’s problems are much bigger than that.” 

Volumes have indeed become increasingly segmented and internalised in light of the challenging volume environment in Europe. Alongside volumes executed by systematic internalisers, the bilateral and negotiated trade segments have also grown exponentially. This is where many suggest regulators should be focusing their attentions. 

“That’s the bigger macro picture, not squabbling over the double volume caps,” says Baugh.

The UK is now bringing in new requirements in May that will transform the way firms tag trades and subsequently report them, shedding more light on volumes and liquidity taking place off exchange. However, a slight hinderance to this is that the UK and Europe have once again opted for ever so slightly different regimes. 

“If we could flag OTC trades and get consistency across the UK an EU it would go a long way to solving a lot of what the consolidated tape is supposed to be doing,” added Rupert Fennelly, head of electronic trading sales and coverage, Barclays Investment Bank, also speaking at Bloomberg’s event.

The events of the last few months have exacerbated a desire from participants to see their appointed regulators re-focus their attentions on core structural issues surrounding Europe’s trading landscape. As a region, Europe must turn its attention away from the small and arguably arbitrary fixes in favour of a resolution to the larger issues at hand.

“We need to have some tougher conversations that might be politically difficult such as simplifying post-trade. That would be a much more meaningful debate than some of the tinkering we’ve done over the last 10-15 years,” concluded Puaar. 

The post The dark trading debacle – does anyone even care? appeared first on The TRADE.

The burgeoning relationship between the two sides demonstrated by this insight was an almost unheard-of phenomenon a decade ago, prior to the introduction of Mifid II in 2018.

Ben Smith

Speaking to this trend, one global head of trading at a large French asset manager respondent to the survey asserted that this activity represents an initial step in a longer journey: “The trend [of trading directly with market makers] started specifically in the ETF market but our goal is to develop step-by-step in other assets like options, bonds.”

Read more: Buy-side agrees market makers will lead ‘new era’ of liquidity

European equity volumes have been stagnant in recent years. In 2023, traders saw little in the way of improvement of liquidity conditions – the average daily value traded fell 16% from 2022, the lowest in a decade. 

With this in mind, Evan Canwell, equity trader and market structure analyst at T. Rowe Price explains: “With lower volumes across Europe, it’s not surprising to see buy-side firms establishing direct bilateral relationships with market makers, especially in the area of systematic, cashflow trades containing no / low investor alpha.”

Broker lists growing

However, the survey also found that despite these low volumes there was also noteworthy, and arguably surprising, developments in the broker space, where 40% of respondents confirmed plans to increase their cash-equity broker lists over the next 12 months.

While 36% of those surveyed responded that they expect their cash-equity broker list to stay the same over the same period, just 24% stated that they foresaw a decrease.

Delving into this, size understandably played a role. While most firms confirmed they keep between 10-20 firms in their broker roster, 30% of the largest buy-side firms trade with more than 50 counterparties. 

Following the introduction of Mifid II the market saw a reduction in broker lists, with one study at the time reporting that more than half of UK fund managers reduced the number of brokers they engage with, within just four months of the new regime. However, this approach is demonstrably no longer the state of play. 

Read more: MiFID II sees more than 60% of UK-fund managers reduce broker lists 

Echoing this in his response to the survey, Ben Smith, head of trading at Independent Franchise Partners, stated: “Thinking back to Mifid II, we expected to shrink our broker list a little once the dust had settled. In truth, that never really happened, and, if anything, the list has grown modestly. 

“On the electronic side, we’ve found that brokers have their own niche when it comes to liquidity seeking, dark aggregation, and interacting with the close. In terms of high-touch, liquidity has become so challenging in Europe that having more connections and options is now vital.”

Trading strategies evolving

Elsewhere, The TRADE and Optiver’s report unpacked changing trading strategies in the face of a 35% decline in the volume of trading on displayed markets. As a result, more trading occurred in dark pools, periodic auctions and off-exchange markets, the survey found. 

The report explains that lower overall volumes coupled with subdued volatility is likely to have contributed to the decline in lit volumes. 

Traders become increasingly concerned around causing market impact by exposing orders to lit venues during quieter market periods, leading many to opt for dark markets or bilateral liquidity sources.

Amidst this landscape, traders identified implementation shortfall (IS) as their preferred benchmark, with two thirds of those surveyed confirming it is used “fairly often” or “most frequently”.

These findings show a clear market preference for IS as it has continued to slowly but surely overtake VWAP as the benchmark of choice. In addition, the close has seen significant growth, due in large part to the increasing number of passive funds that use end-of-day prices as a benchmark.

Among the key buy-side trends explored in the survey conducted by Optiver and The TRADE was the development of more advanced transaction cost analysis (TCA). When asked what impact improved execution analytics would have on the trading desk, 81% stated that it would have ‘some’ or ‘significant’ positive impact.

Read more: A TCA wish list for the buy-side

Specifically, The TRADE’s survey found this especially true when it came to real time TCA, a key industry talking point over the last couple of years. Almost 35% of buy-siders highlighted that real time capabilities would most improve their transaction cost analysis processes, closely followed by almost a third who highlighted the importance of an increase in the number of data points. 

Market structure concerns

On the topic of data, there’s of course a lot to unpack across the buy-side, with the survey finding that data fees and consolidated tapes (CT) top the list of market structure concerns. 

Specifically, when asked which market structure and regulatory topics would have the most impact on their firms, a third of the buy-siders responded that lower market data costs would be most impactful, followed by almost 50% who highlighted the CT.

There has been a historical lack of a consolidated data source in market, alongside a monopolistic environment when it comes to venues and execution platforms. Owing to this, buy-side firms have regularly been charged high fees for valuable transaction data – to which they have contributed – essentially paying to buy back their own data. One answer to this problem is of course the hotly debated notion of a consolidated tape. 

The European Securities and Markets Authority (ESMA) expects to authorise a consolidated tape provider for bonds in 2026, while the UK Financial Conduct Authority (FCA) has effectively met its commitment to have a regime for a CT in place by this year.

The consolidated tape issue, on both sides of the Channel continues to be analysed, however the emerging consensus appears to be that, in the end, together is better.

As Smith explained: “We think that Europe would benefit greatly from a consolidated tape. Foremost, it would serve as baseline and help to democratise access to market data. Importantly, it would make Europe appear more as ‘one market’, hiding away some of the complexity of its market structure that has become anathema to global investors.” 

Read more: If you build it, will they come? Does data hold the key to a healthier market?

“The topic around the consolidated tape makes sense for us and we consider that it’d be helpful to enrich any database, to increase transparency and to capitalise on this to deploy more robust AI models around execution,” added a global head of trading at an undisclosed large asset manager. 

The TRADE’s European cash equity trading survey included insight from 225 buy-side traders, including a significant number of active asset managers and private banks. 

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The three firms join a growing list within Sustainable Trading’s global membership network of investment managers, banks, brokers, exchanges, trading platforms and service providers who share the goal of improving the sustainability of global markets.

Members of the network are now making progress with the implementation of the Sustainable Trading Best Practices, Sustainable Trading confirmed, through which the associated measurement framework will be utilised by members to track their progress and benchmark themselves against their peers.

Watch now: Sustainable Trading’s Duncan Higgins on integrating ESG into trading

The addition of Exegy, ING and Optiver follows the recent appointment of Eleni Coldrey of Euqinix, Asha Patel of Instinet and Ebrahim Patel of RMB, to Sustainable Trading’s board.

“We are delighted to welcome Exegy, ING, and Optiver to our membership network. Their extensive experience of global markets, and common commitment to driving a more sustainable future for the financial industry, will bring invaluable insights to Sustainable Trading,” said Duncan Higgins, founder and chief executive at Sustainable Trading. 

“Their participation further strengthens our collective efforts to drive positive industry change and greater sustainability in the global markets trading industry.”

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The addition of Optiver marks a significant milestone for the partnership as it becomes the first market-making company to join as a full member.

Plato Partnership stated that one of its core missions for 2023/24 is to broaden its horizons with the aim of hearing, considering and representing a wider array of market participants.

Adding Optiver will help represent the diverse interests of all market participants alongside fostering innovations to improve the overall market experience, according to Plato.

“As part of our mission to improve markets, we proactively seek to share our knowledge and expertise as a way of driving progress throughout our industry,” said Jan Boomaars, chief executive of Optiver.

“A leading forum for open discourse and debate on financial markets, the Plato Partnership is a natural venue for Optiver to continue this work.”

Optiver is set to appoint a representative to join Plato’s advisory committee, will actively engage in and contribute to the MI3 academic initiative, and become a valuable member of the Plato Turquoise Expert Group (TPEG).

“We are thrilled to welcome Optiver to Plato Partnership as our first market-making member. This collaboration aligns closely with our mission to foster a diverse and dynamic set of voices as we look to innovate the equity market,” said Mike Bellaro, chief executive of Plato Partnership.  

“Optiver’s inclusion not only expands our membership base but also injects a new kind of expertise and innovation that will undoubtedly benefit not only our advisory committee and initiatives, but all market participants.”

Earlier this year, Plato Partnership added Liquidnet as an inaugural strategic partner, which followed the addition of Kepler Cheuvreux, UBS Asset Management and Pictet Asset Management as founding members late last year.

Elsewhere, Capital Group’s Simon Steward was appointed buy-side chair of Plato Partnership, replacing Christoph Hock, head of multi-asset trading at Union Investments, in October.

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New to Leaders in Trading 2023, this category is designed to recognise those firms and individuals going above and beyond to service and support their clients in light of the numerous regulatory and market structure overhauls taking place across the globe.

Post-Brexit, divergence continues to play a part in the regulatory regime in the UK and Europe, while other major shifts such as the transition to T+1 settlement in the US are likely to significantly impact the way institutions operate.

In light of this, The TRADE has selected Goldman Sachs, Optiver, RBC and TD Cowen for the 2023 shortlist, following their efforts over the last 12 months. 

Goldman Sachs

Over the last 12 months, Goldman Sachs’ market structure and regulatory team, spearheaded by chief operating officer for EMEA equity execution services, Eleanor Beasley, has continued to provide thought-leading content in the context of market structure changes in the EU and UK. Whether that has been covering consultation papers that continue to come from the UK and the EU, or highlighting changes in exchange offerings or migrations, the investment bank has provided insights on what it believes the impact is going to be and what is going to happen to the broader liquidity landscape as a result.

Alongside helping its clients to make sense of regulatory regime changes in Europe and the UK, Goldman Sachs has produced deep dives into regulatory updates and launched a new quarterly market structure podcast – ‘Evolving Equities’ – in which Beasley hosts a new external guest each episode. The quarterly content aims to provide clients with insights to better understand and navigate the equities landscape. Other regular content by Goldman Sachs includes weekly liquidity colour, monthly liquidity analysis, quarterly cost to trade analysis and quarterly developed vs emerging markets liquidity deep dives.

Goldman Sachs’ market structure team works as part of a broader team within the investment bank, including the quant analysts and its SOR strategy team to ensure that market structure and information received from regulators is an integral part of its broader liquidity strategy. 

Optiver

With former TRADE reporter and Rosenblatt analyst, Anish Puaar, at the wheel, non-traditional liquidity provider Optiver has made a significant push into the thought leadership sphere in the last 12 months, aiding both its own counterparties and firms across the wider market in their understanding of the shifting market structure and regulatory landscape.

In the last year, the market maker has published whitepapers and spoken at industry conferences on a variety of topics including: the “anti-competitive nature” of single market-maker exchanges, the benefits and risks of Europe following suit with the US in the pursuit of T+1 settlement, the international financing review (IFR), closing-auction outages and market-maker protections in the options market. As well as the history and uses of short-term options, capital markets recommendations for incoming EU policymakers and the Asia-pacific equity options markets.

The market maker has also introduced a quarterly market structure newsletter for trading counterparties, highlighting statistics like liquidity and trading spreads across cash equities trading venues, and published comment letters on Securities and Exchange Commission (SEC) equity market structure proposals. Optiver is committed to voicing its opinion in industry bodies and at industry forums and conferences. Subscribers to the market maker’s Insights email list are up 39% this year, Optiver confirmed.

RBC

Headed up by global head of market structure, Rich Steiner, with consultants on the ground in Europe such as former TRADE editor, Hayley McDowell, RBC’s global market structure team provides insights and content on key themes and trends to assist clients with their execution processes and decisions. They produce monthly recaps, key development notes and in-depth reports on market structure themes which are distributed regularly to clients, as well as curated content on client request.

The team collaborates closely with product to develop the algo suite and logic based on regulatory, liquidity and other market structure changes to improve performance, reduce costs and increase efficiency for its clients. Current themes of focus include liquidity shifts, AI and machine learning, T+1 settlement, upcoming changes to Mifid II research rules and market outages.

Earlier this year, RBC’s Digital Solutions and Client Insights (DSCi3) business expanded Aiden, its proprietary AI-based electronic trading platform, into Europe. The tool is designed to reduce slippage against the volume weighted average price (VWAP) benchmark while minimising market impact. According to RBC, it’s market structure team played a key role in Aiden’s implementation by ensuring the algorithm leverages the nuances of the European trading landscape and informing clients of Aiden’s capabilities and logic with the product and coverage teams.

TD Cowen

TD Cowen’s market structure offering is spearheaded by former Citi, LSEG and Turquoise alumnus James Baugh, now head of European market structure for the firm. TD Cowen, part of TD Securities, aims to put market structure at the core of its electronic trading business. The market structure offering provided by the institution is a “linchpin for liquidity strategies and a driving force behind its distinctive algorithmic trading offerings,” TD Cowen told the TRADE.

The TD Cowen market structure team provides opinions and insights into regulatory and market structure changes, adding depth, perspective and practical value by illustrating how these changes directly affect day-to-day business. The firm also regularly distributes notes and updates to the buy-side community. These updates cover a wide range of topics, such as the implications of diverging regulations post-Brexit, the re-bundling of research, the ban on payment for order flow (PFOF), primary market outages and data centre moves.

Actively engaged in discussions on key topics impacting the industry, TD Cowen participates in most major industry forums and conferences, reaching markets across the continent and as far afield as South Africa. Its involvement with Q15, where James Baugh serves as an advisor to the Equity Quorum, emphasises its role in shaping industry dialogue.

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Over the last year, the liquidity landscape has continued to develop, with players continually innovating their offerings and growing their teams to better meet client needs.

Among the key players in this competitive landscape, The TRADE has selected Citadel Securities, Optiver, Virtu Financial, and XTX Markets for the 2023 shortlist, following various individual achievements by these businesses over the past year. 

Citadel Securities 

Needing little introduction, Citadel Securities, is one of the largest market makers in US Treasuries and USD interest rate swaps globally, and serves an extensive list of financial institutions, including: banks, asset managers, pension funds, hedge funds, central banks, and sovereign wealth fund. Its focus is to provide investors with the liquidity needed to trade equity and fixed-income products in any market condition.

Over the summer, Citadel Securities entered into the credit sphere amidst technological advancements, offering US investment-grade bond trading to clients as of June. Speaking at the time, head of fixed income ETF trading, Bob Cariste, highlighted that the initial focus for the business was on investment-grade (credit) due to the fact that that is where the greatest overlap exists with Citadel’s existing fixed income business.

The firm is active across more than 55 markets, with $440 billion in trades executed per day. Last August, the business opened its Tokyo office, continuing its global expansion in the region – offering US fixed income products to Japanese institutional investors. The firm’s growing global footprint now includes 15 offices across North America, Europe, and Asia Pacific.

Optiver

Optiver has gone from strength to strength in recent years, developing a unique European cash-equity franchise thanks to its expertise in options and ETF market making. Over the last 12 months, the business has grown its client roster, establishing cash-equity trading relationships with various entities including: asset managers, sovereign wealth funds and private banks. Optiver’s approach is to give institutional asset managers access to liquidity from its central risk book.

Optiver’s net trading income in 2022 saw a 42% year-on-year increase, with a total equity of €3.6 billion compared to € 2.8 billion the previous year. Optiver’s market structure team actively monitors developments among exchanges, custodians, industry groups, and policy makers in order to formulate the business’ stances. The firm also regularly publishes whitepapers and shares insights on market structure and regulation, recently sharing insights around: T+1, IFR/D, key options considerations, EU and US policy, and venue functions.

In March, Optiver was the lead investor in the equity funding round for the launch of the MEMX Options exchange. As part of its commitment, the business confirmed it would assume a MEMX board seat, as well as chairmanship of a newly-created Options Market Structure Committee. In September, the electronic market maker selected Philippe Rizzo to join its institutional sales team, with his role focused on cash equity sales in France, Belgium, Luxembourg and Switzerland. Rizzo joined from Instinet, where he previously served as a global equity sales trader. The same month, Optiver took a further step in its US expansion plans with the opening of a new Chicago office, an increase of over one-third from the firm’s previous footprint in the city. 

Virtu Financial

Global market maker Virtu Financial has had a stellar performance over the last 12 months with a high number of business updates across various areas as it enhanced its offering aimed at creating more efficient global markets. Virtu’s product suite includes offerings in execution, liquidity sourcing, analytics and broker- neutral, multi-dealer platforms in workflow technology. It operates across Asia Pacific, Canada, EMEA, and the US.

In August, Virtu entered into a strategic alliance with InvestorLink to integrate order management and AI-based matching platform with Virtu’s infrastructure to offer retail investors better access to the primary markets. In June, Virtu upgraded its POSIT Alert block trading capabilities to include automated dark liquidity seeking in a bid to tackle fragmentation in the non-displayed markets. Named Alert+, the solution aims to give traders an increased opportunity to execute any residual and reduce execution risk by sourcing incremental dark liquidity and completing orders more quickly. The upgraded workflow solution allows users to immediately elect to route residual share quantities not filled on POSIT Alert to be executed in the dark via Virtu’s Covert algorithm.

Back in April, the business’ Triton execution management system (EMS), Triton Valor, was integrated with the bookbuilding platform offered by equity markets technology solution, Appital. Named Appital Turquoise BookBuilder, the solution is an algorithmic bookbuilding platform which brings a typically manual and opaque process into an automated, electronic offering. More recently, in September, Triton Valor was integrated by Sumitomo Mitsui Trust AM. Triton Valor supports trading across: Munis, MBSs, global corporate and sovereign bonds, fixed income ETFs, EM debt, futures and CMOs, aiming to allow users to utilise a single dashboard across asset classes. Last March, Virtu added Liquidnet alumnus Leon Mouzourakis to its execution services team in an electronic trading role. 

XTX Markets 

London-based algorithmic market maker XTX Markets continues to impress as its operations develop. The business partners with counterparties, exchanges and e-trading venues globally and provides liquidity in the equity, foreign exchange, fixed income and commodity markets. XTX Markets’ clients range from regional banks to institutional investors – including macro, systematic funds and real money. The business hit record profits of £1.095 billion from its UK entities in 2022, up 64% from the previous year.

Following solid results, the business continues to be at the forefront of making financial markets more efficient for all participants. Its focus is on reducing the cost of trading for clients through its analytical tools and data-driven insights. The quantitative trading firm opened its new office in New York earlier this year, and also has bases in London, Mumbai, Paris, Singapore, and Yerevan.

The team is made up of more than 200 people across the globe, speaking 26 languages. Last October, XTX Markets appointed Zar Amrolia as chair, replacing Niki Beattie who held the position for five years. Amrolia’s appointment came as part of XTX Markets’ leadership transition. The business is focused on growing its equities franchise in the US going forward. In March, XTX Markets appointed Credit Suisse alumnus Charlie Whitlock as head of Americas distribution, leveraging his 25 years of experience in financial markets. Based in XTX’s New York office, Whitlock is responsible for growing XTX’s single dealer platform business in the US.

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Balyasny Asset Management appointed Harrison Chesterton as associate director within its equity finance trading division. According to an update on his social media, Chesterton joined Balyasny from Capstone Investment Advisors after nearly a year and a half, most recently serving as vice president, portfolio finance and treasury trading. Before joining Captsone Investment Advisors, Chesterton spent almost eight years at Barclays Corporate and Investment Bank. Most recently he served as vice president of delta 1 and equity financing – a role he was promoted to after holding the position of assistant vice president for three years.

Electronic market maker Optiver selected Philippe Rizzo to join its institutional sales team, effective from 9 October. Rizzo’s new role will be focused on cash equity sales in France, Belgium, Luxembourg and Switzerland. Rizzo will join Optiver from Instinet, where he previously served as a global equity sales trader. Prior to that he held a similar role at Goldman Sachs, based in London. Elsewhere in his career, Rizzo served as a senior global equity trader at Comgest.

Axis Capital Markets appointed Lewis Jones in an institutional sales and trading role. According to an update on social media, Jones joined Axis Capital Markets from IBP Markets, where he served as an equity sales trader for nearly three years. Prior to that, Jones held a corporate broker and equity sales position at ETX Capital. Elsewhere in his career, Jones was self-employed as an options trader at Delta Capital Management; a corporate broking consultant at Turner Pope Investments; and as a proprietary trader at Schneiders Trading Association.

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