2 min read

Buy side equity traders spending more time looking for liquidity

needs include liquidity in small/mid-cap stocks and access to dark pool liquidity

Buy side equity traders are spending increasing amounts of time searching for liquidity in fragmented markets as conditions become more challenging, according to a new report – Globalisation of Algorithmic Equity Trading: A Buy-Side View from Coalition Greenwich

The report, which polled 61 buy side equities traders during November and December 2022, said that reduced commission rates, constrained budgets, smaller team sizes as well as regulatory changes have left both asset managers and brokers facing greater pressure to automate their trading workflows and accomplish more with less.

It noted that rapid evolution in global equity market structure has dramatically changed the job of equity traders and the process of ensuring best execution on trades.

It said the buy side’s biggest obstacle in evaluating best execution today revolves around analysing data—algo, venue and overall transaction cost performance.

Findings revealed 58% of respondents point to transaction cost analysis (TCA) overall as one of their top two challenges while 48% believe it is venue selection/performance analysis, and 47% name algo performance analysis.

Analysis of trading venues and the performance of algorithmic strategies are factors that have only emerged as primary considerations over the past decade or so, according to the report.

To ensure positive outcomes in these areas, buy side traders are focusing on finding the right partners for low-touch market access.

“Buy side trading desks are seeking out providers who can deliver essential features like liquidity in small/mid-cap stocks, access to dark pool liquidity, anonymity and fast execution, and low latency on trades,” says Jesse Forster, senior analyst at Coalition Greenwich Market Structure & Technology and author of the report.

He adds, they are devoting significant time to evaluating the performance of algorithms, as measured by metrics like market impact minimisation, implementation cost shortfall and internal volumes weighted average price (VWAP).

According to the respondents, successful algorithmic trading providers will need to build reliable and easy-to-use platforms, backed by high quality support, with access to segmented dark and conditional liquidity as differentiators.

Around 80% also put significant value on controlling the ability to route or not route to particular venues.

“While the buy side may not be as interested in micromanaging algorithmic logic—especially via an order ticket—they do want control over which venues they access,” says Forster.

The report also identified the similarities and differences in perspectives of buy-side traders across North America, the EU and the UK as they pertain to best execution, algo platform and venue selection, strategy discretion, regulatory initiatives, and market microstructure.

For example, in the US, the biggest challenges cited were a general lack of liquidity and fragmented venues while EU respondents said the same but added the consolidated
tape and war in Ukraine as top concerns.

As for the UK, key issues mentioned were Brexit and a consolidated tape, along with the usual lack of liquidity and transparency.

The report also identifies what buy side traders see as the biggest market structure challenges, and the changes needed to overcome them.

©Markets Media Europe 2023


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