Diminishing Liquidity Is Driving US Equities Firms To Invest In Analytics And Automation Technology

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Wednesday, July 24, 2019   /    12:49PM    /    By  MondoVisione   /   Header Image Credit: TABB Group

 

While volatility and illiquidity in the U.S. equities markets have created obstacles to low-cost transacting, trading innovations being put in place in 2019 are now making liquidity more efficient and accessible to buy-side firms that continue to invest in technology, according to new research, “IET 2019, Liquidity: Blocks, Algos, Analytics and Impact,” the first of a six-part US equities trading interview-based benchmark study that has been published annually by TABB Group for 15 years.

 

 

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Between technological innovation, venue fragmentation, the transition from active to passive trading, as well as the restructuring of research, commissions are being severely squeezed, says Larry Tabb, founder and research chairman who co-authored “IET 2019” with US equities analyst Campbell Peters.

 

More trading responsibility is falling on the buy-side trader, and given the 2018 spike in volatility, liquidity has become increasingly difficult, not only to find, but even to piece together through the use of algorithms. This has become the most important buy-side trader accessory, outstripping sales traders and capital, occurring at the same time central risk books (CRBs) are becoming an increasingly important tool when market liquidity isn’t sufficient, especially for larger managers eager to efficiently aggregate liquidity, manage execution costs and analyze their execution quality in order to trade better.”

 

For the 2019 Institutional Equity Trading (IET) interview-based study, Peters spoke with heads of trading at 92 buy-side firms in the first and second quarters of the year. In Part 1, in-depth interviews covered buy-side views on liquidity, as well as usage and trends pertaining to volatility, block trading, conditional orders, central risk books, algorithmic execution, algo wheels, TCA and performance measurement.

 

Subsequent reports will focus on brokers, research unbundling, current views/trends affecting the desk, technology products and initiatives and market structure.

 

A sampling of key data includes:

  • The spike in volatility in 2018 impacted liquidity for most buy-side firms with mixed views: 58% of small firms said impact was positive, 50% of large firms said impact was negative.
  • Block trading accounts for 18% of overall buy-side trading flow; for large firms, 20% of total flow, up from 12% in 2017.
  • Percentage of firms using conditionals increased from 54% to 74% from 2017 to 2018.
  • 40% of firms are using, testing or evaluating algo wheels, pointing to higher usage in 2020.
  • TABB projects ITG will lose market share for its TCA and Triton EMS products due to buying Virtu, as nearly a third of its TCA users say they plan to reduce their usage of the TCA platform.

 

Peters notes that although a broker’s CRB offers an added block liquidity channel for buy-side traders, many prefer not to rely heavily on CRBs as a consistent source of liquidity.

Firms said that although CRBs offer blocks of shares, the liquidity will most likely be smaller blocks of blue-chip companies rather than large blocks of small- or mid-cap stocks. They also expect to continue using their broker’s CRB current rate if not increase their usage into 2020.

 

Looking ahead, Tabb says that although larger firms still have access to preferential treatment from their brokers and medium firms have budgets to invest in sophisticated technology platforms, the smallest   firms must weigh the cost of technology build with the benefits of reduced market impact. “For small firms, 2019 will prove to be a pivotal year for technology adoption, as conditionals, CRBs and algo wheels become increasingly available. Whether or not these firms will be able to use these tools effectively and stay profitable remains to be seen.”

 

The 28-page IET 2019 Part 1: Liquidity with 22 exhibits is available for download by TABB equities clients and pre-qualified media at https://research.tabbgroup.com/search/grid. For more information or to purchase the report, write to info@tabbgroup.com. 

 

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IET 2019, Liquidity: Blocks, Algos, Analytics, and Impact

Author(s): Campbell Peters, Larry Tabb

Date: July 18, 2019

Research Type: Interview Based Study


Executive Summary

 

The world is in transition: political, social, and economic. So too are the markets. Between technological innovation, venue fragmentation, the transition from active to passive, as well as the restructuring of research, commissions are being severely squeezed. More trading responsibility is falling on the buy-side trader, and given the spike in volatility, liquidity has become increasingly difficult, not only to find, but even to piece together through the use of algorithms. Algorithms (algos) have become the most important buy-side trader accessory, outstripping sales traders and capital, while central risk books (CRBs) are becoming an increasingly important tool when market liquidity isn’t sufficient, especially for larger managers.

 

In recent years the sell-side has introduced several offerings to assist buy side traders with the process of sourcing liquidity and executing trades efficiently. Conditional orders have automated the process of negotiating block trades via a broker. They empower traders to search for block liquidity in multiple block trading venues simultaneously with minimal risk of over execution. The introduction of broker-provided liquidity by CRBs has presented a new source of block liquidity for investors as well. Trading firms can further automate the manual decision-making processes by incorporating their execution and routing logic into a sophisticated suite of algos in the form of an algo wheel.

 

These innovations are made possible by the proliferation of data and measurement tools, allowing buy-side firms to quantify the economic costs associated with various algos and liquidity sources. By measuring and comparing their routing decisions and execution costs, firms can ensure that they are only trading when and where the outcome is profitable for them. In addition to measuring execution performance, firms are now integrating TCA and routing analysis into their wider decision-making processes and utilizing more data inputs than ever before in order to drive profitability and efficiency.

 

These tools enable traders to minimize slippage and transaction cost, helping to offset the challenges of declining natural liquidity in the US equities market. While this is an obvious positive for any trading firms, the economics don’t always make sense for the smallest firms to invest in their own technology. While larger firms still have access to preferential treatment from their brokers, and medium firms have budgets to invest in sophisticated technology platforms, the smallest firms must weigh the cost of technology build with the benefits of reduced market impact. For small firms, 2019 will prove to be a pivotal year for technology adoption, as conditionals, CRBs, and algo wheels become increasingly available. Whether or not these firms will be able to use these tools effectively and stay profitable remains to be seen.


 

US Institutional Equity Trading 2019

For TABB Group’s 15th annual Institutional Equity Trading (IET) report, we interviewed heads of trading at 92 buy-side firms in the first and second quarters of 2019. The results will be published in six parts. In Part 1, we reviewed buy-side views on liquidity, as well as usage and trends pertaining to volatility, block trading, conditional orders, central risk books, algorithmic execution, algo wheels, TCA, and performance measurement.

 

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Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

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