FREE SITE REGISTRATION

Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Securities Industry News can deliver.

FREE site registration entitles you to:

Exclusive Online Only Content

Newsletters and Alerts

Industry White Papers

Online Seminars ... and Much More!

Sifma Technology Management Conference

Low Latency Not a Go-It-Alone Proposition |  Fragmentation's New Discipline: Liquidity Management |  Asia Comes Around to Algorithms |  ATSs in Europe Follow U.S. Lead |  People Are Scarce Again | 

Fragmentation's New Discipline: Liquidity Management

June 18, 2007
By Janice Fioravante

With margins shrinking, trading speeds accelerating and myriad automated execution choices at traders' disposal, securities firms can't find the profits that used to flow from simply serving as intermediaries between clients and exchanges. As they look to bring added value to client relationships, there's a greater recognition of the benefits of internalization of orders, both to the brokers and the buy side. As counterparties, taking on some of the market risk and allocating capital against it, broker-dealers perform the exchange functions of making markets and matching orders, which can be crossed internally or routed to alternative trading systems and electronic communications networks (ECNs).

Amid these structural changes and fragmentation of markets, liquidity management has emerged as part of the automated trading process. BNY ConvergEx, for one, has underscored the growing primacy of liquidity management by making that the label of an entire suite of trading and analytic products. Research firm Tabb Group has deemed this the next phase of electronic trading as customer flow and order flow tools are widely accepted.

Technology is simultaneously driving market-structure changes and empowering both buy- and sell-side firms to deal with them. "There was always the upstairs market, but now dark pools are mainstreaming and everyone's adding them--the brokers and the exchanges," observed David Easthope, senior analyst with Boston-based research firm Celent. One reason for the proliferation is that a dark pool or ECN is not costly to set up--in the tens to twenties of millions, he said.

All this fragmented action reflects a basic principle: The brokers want to bypass the middlemen--exchanges--in search of the other side of the trade, regardless of what type of liquidity pool it might reside in.

The exchanges, of course, are not sitting idle. They're adding crossing systems; Nasdaq Stock Market recently announced it is adding intraday crossing to its opening and closing crosses. In the agency brokerage realm, BNY ConvergEx's suite includes its ConvergEx Cross, VortEx dark pool and a package of algorithms.

Celent's Easthope said that ConvergEx may be "in a good spot." It and other pure plays that can be pure agencies and not engage in potentially conflicting proprietary trading--other examples include Edge-Trade and Investment Technology Group with its Posit cross--offer anonymity and best execution with robust technology.

The brokerages strike back with their own offers of lower costs, dark pools, and crossing networks. "There will always be the innovators who come up with the latest advantage, and brokers or exchanges who swoop down on the innovators," said Easthope, who offered Goldman Sachs & Co.'s RediPlus as an example. Algorithmic trading was originally start-up firms' advantage and now it is par for the course.

The quest for liquidity and best execution is ever-continuing. And the buy side as always looks for low-cost execution while holding down market impact, shredding huge blocks into small pieces.

"With execution and liquidity management systems, there are more chances to work with one-stop shops," said Harry Gozlan, CEO of Paris-based Smart Trade Technologies, which markets its platform as a liquidity management solution. "Commissions can be discounted because firms don't have to pay exchange fees, and they can offer the buy side faster service and no waiting for exchanges--there are many advantages for clients."